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Why BlackBerry Ltd. Shares Are Plunging

A lot has gone right for BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) since new CEO John Chen took over. Mr. Chen has shifted the company towards software, cut costs, and dramatically improved BlackBerry’s financial position. The stock has responded in kind by doubling over this time.

That said, not everyone is convinced. On Monday, Goldman Sachs analysts Simona Jankowski and Doug Clark downgraded their rating on BlackBerry to sell. They also lowered their price target by US$1 to US$9. BlackBerry shares have responded in kind, dropping by nearly 8% (as of this writing).

So, what prompted this downgrade? We take a look below.

“Very low buying intentions”

As part of BlackBerry’s shift towards software, Mr. Chen is targeting $500 million in annual software-related revenue by February 2016, which is double the current number. Analysts see this as unrealistic, given that “its target implies that it would leapfrog the market leaders in just one year, which we view as unlikely, given the competitors’ much better traction.” Even worse, Goldman’s surveys show “very low buying intentions” for BlackBerry’s Enterprise Mobility Management (EMM) solutions.

This isn’t the first time we’ve heard such findings. Back in January, Morgan Stanley analyst James Faucette published the results of his own survey, and the numbers weren’t good for BlackBerry. According to the survey, only 15% of 150 CIOs in the U.S. and Europe were willing to evaluate BlackBerry for EMM, down from 22% in June. Over this same time interval, the number of CIOs who had evaluated BlackBerry’s software but declined to purchase it nearly doubled.

Poor profitability

Ms. Jankowski and Mr. Clark didn’t stop there. They also predicted BlackBerry’s service revenue to decline by nearly 50% in the upcoming fiscal year, which is well below consensus forecasts. This is especially concerning, because service revenue is very high margin.

As a result, analysts are expecting BlackBerry to lose $0.26 per share this year, which is far worse than consensus. Even if hardware sales come in better than expected, the company’s profitability wouldn’t really be affected, since hardware sales come with very little profit. The Goldman analysts are also forecasting a miss for the current quarter.

So, what should investors do?

The Goldman report (especially the survey) should raise some serious concerns, and offer us all a reminder of the challenges that BlackBerry faces.

Still, the report focuses primarily on the next year, while BlackBerry’s shareholders should be more long-term oriented. Remember, the company has some massive opportunities (for example, there’s the Internet of Things, its patent portfolio, and BBM) which will take a lot longer than one year to fully materialize.

So, if you’re a true believer in BlackBerry, you must be willing to endure the bumpy rides that Goldman is predicting. On the other hand, if you’re looking for some near-term stability, you should take Goldman’s advice.

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Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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