BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) has gotten crushed ~28% after a rally earlier in the year caused by a solid quarter and the release of bullish analysis courtesy of Citron Research. Shares of BB are now down ~22% since my initial warning that the rally was overdone and that a much better entry point would present itself in the months ahead.
Too many unrealistic short-term expectations caused the rally to be short-lived
Investors got overly excited by the events which sparked the impressive rally, and those who purchased shares at the peak are definitely regretting it now. Sure, BlackBerry is back on the right track, but that doesn’t mean shares are going to double or triple over the course of a few months. I believe the company has reached a turning point, but only patient, long-term investors will reap the rewards. I think it’ll be a long, but profitable way back to the top for the business which has reinvented itself.
Short-term hype has faded
Now that shares are at the $11 levels, I think it makes more sense to buy today, especially since all the short-term hype has faded away. The QNX operating system is cutting-edge with many potential applications, including fleet-tracking radar services and self-driving cars, but what many investors need to realize is that there’s a tonne of competition in this space.
That doesn’t mean QNX is a mediocre product; it’s a really secure product which is extremely important in a time where it seems there’s a device compromise or a high-profile hack job on a daily basis. The issue is in the speculative nature of what may happen when self-driving cars are on the road. Will QNX be the dominant operating system out there? Or will a better alternative have market dominance? It’s really hard to tell, so the uncertainty makes BlackBerry a potentially volatile stock to own for the long term.
In BlackBerry’s most recent quarter, it saw sales nosedive by 41% on a year-over-year basis, even though earnings were clocked in at $671 million. That’s quite a lateral move compared to the impressive quarters earlier in the year. If you’re a long-term investor, you’d better get comfortable with volatility and unpredictable results.
Bottom line
BlackBerry is a great turnaround candidate that’s on the right track, but investors need to be realistic. There are many growth opportunities, but your best bet would be to buy and hold for many years, rather than buying with the expectation of huge short-term capital gains.
Shares of BB currently trade at a 41.35 price-to-earnings multiple, which is definitely not cheap, but if you’re keen on owning shares, you may want to buy incrementally over the coming months to reduce risk.
Stay smart. Stay hungry. Stay Foolish.
