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532 Million Reasons Why I’ve Changed My Tune on BlackBerry Ltd

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Dear Fellow Fools,

$532 million – that’s how much cumulative free cash flow BlackBerry (TSX:BB)(NASDAQ:BBRY) has generated in the past three quarters.

That’s a far cry from the negative $980 million of free cash flow that the company booked in the preceding three quarters.

For as long as I can remember, I talked down about this company and essentially smirked whenever it was mentioned, but the dramatic turnaround in the company’s free cash generation put BlackBerry under a dramatically different light in my mind.

Rather than a company with a financial risk profile that was seemingly ticking higher on a daily basis, all of a sudden BlackBerry’s business had started to generate the lifeline of any enterprise – cold hard cash. And instead of ticking higher day-by-day, BlackBerry’s financial risk is in decline. Not only is cash coming through the door, thanks to the added boost of some debt (another positive sign — somebody was willing to lend to it), BlackBerry exited the last quarter with a US$2.8 billion stockpile of cash on its balance sheet.

I once had a significant concern about BlackBerry’s financial positioning, but that’s now at least on hold, which has allowed me to take a less-biased look at the company’s prospects from a business perspective. And while the future remains murky for BlackBerry given the continued erosion on the handset side of the business, there are some interesting “things” a-brewing.

A way forward is in the oven

“Things” just might be the word of the decade when it comes to the opportunity that lies ahead of BlackBerry. More specifically, the “Internet of Things” (IoT).

Perhaps you’ve heard of the IoT, but in case you haven’t, society is moving to the point where not just everyone, but everything will be interconnected. Cars, refrigerators, thermostats, TVs—you name it and it’s going to be connected. What this means is that one day you’ll be able to control your car from your refrigerator and vice versa.

(Not really, but you get the idea.)

The potential is huge. Some estimate that the IoT could add $19 TRILLION to the world’s gross domestic product by 2020.

Where BlackBerry enters the fray is not necessarily with its handheld devices.

Last May, the company announced the inception of Project Ion. Project Ion’s initiative is to promote IoT development with a goal of providing access to new kinds of insights derived when every aspect of a business is a connected, data-gathering device. It seems that BlackBerry would like to leverage its secure network—which is the backbone of the company—and serve as the medium provider for the explosion of connections that’s set to occur.

How this all plays out is unknowable. The real message is that BlackBerry has FINALLY realized its legacy handset business isn’t going to drive the company forward. Perhaps it can introduce new mobile devices that recapture a small piece of the market share that it has lost, but that ship has essentially sailed.

This is another huge positive in my mind, because this is still a company with a pile of cool technological “stuff” embedded within. It’s just a matter of reshaping that “stuff” into a useable form – and that doesn’t mean coming out with an updated handheld device every couple of months.

This evolution will take time, and when the company was burning cash like it was kindling, time was something it didn’t appear to have. Now that the cash fire has been extinguished, time is once again on BlackBerry’s side.

How I’m playing it

In my opinion, if the company is able to successfully orient its technology to become a leader in the development of the IoT, this has the potential to be a home run of an investment idea. Though financial risk is off the table, for the moment anyway, there is still much uncertainty that exists, but at least the upside appears significant.

In an attempt to maximize my returns, and risk for that matter, I’ve taken the stance that BlackBerry is going to make good progress with its IoT initiatives over the next couple years. To put this stance into action, I’ve purchased January 2017 call options on BlackBerry.

Realize that I’ve put a very (VERY!) small percentage of my portfolio into this speculative bet, as that’s all it is – I wouldn’t consider this an investment in any way – and am fully aware that I could lose the entire sum should things not play out as I’d like.

This is not how I typically try to grow my family’s money, but in my mind, though I could lose the entire bet (sort of like the bit of money that I sunk into an NCAA basketball bracket pool last weekend), the payoff, should things work out, could prove significant (much like that same NCAA bracket pool). An all-or-nothing gamble if there ever was.

Given that I’m tied in until January 2017, I couldn’t care less if BlackBerry “beats” or “misses” its estimated results when the company reports tomorrow. Either way, the release is likely to garner a load of attention, as it always does. However, in my mind, the signposts to look for are the continued generation of positive free cash flow (to ensure that financial risk profile remains in check) and any qualitative IoT-related developments.

Not for all

To be clear, my bet on BlackBerry is an entirely personal decision and not one we’ve made within our members-only Stock Advisor Canada service (which I lead). There is still a load of uncertainty swirling around BlackBerry, and recommending speculative bets that could one day end up worthless is not what our service is about at all.

You see, Stock Advisor Canada looks for, and recommends, the best businesses in Canada and the U.S. that offer appealing risk/reward relationships for the long term. We call this approach a “business-first philosophy,” meaning we want to recommend stocks that have quality underlying businesses behind them. It’s our view that right now at least, this approach is not well suited to a situation like BlackBerry.

Indeed, every month we provide members with one Canadian, and with the help of our Foolish friends south of the border, one U.S. recommendation. (The most recent of which is a very interesting small-cap health-care-related entity that we just released yesterday.)

We consider this a best-of-both-worlds approach, as our markets complement each other very nicely.

These recommendations come in the form of an initial research report that shows up in your inbox on the second and fourth Wednesday of each month and provides all the background you’d ever need to make a decision on your own. And from there, we’re constantly monitoring our recommended companies (and tracking their performance on our Scorecard for all to see) to ensure that you’re up to speed with whatever’s going on and provide all of our most current thoughts.

But stock recommendations and ongoing research are just the beginning. Stock Advisor Canada is really all about making you a better, long-term investor and we’ve got loads of bonus material, an interactive community, and plenty more to ensure this happens.

While there’s no BlackBerry recommendation, for now anyway, we’ve got 33 others that are collectively beating the market that I’d love for you to learn all about.

And with our 100% 30-day money back guarantee, you can do so – ON US! That’s right, sign up to Stock  Advisor Canada by clicking here, take advantage of our 75% off sale that ends this weekend and download everything you see within the site Then, if you’re not pleased, simply send our member services dude Rob an e-mail within 30 days and we’ll wish you well, with a full refund of course – no questions asked.

You’ve got nothing to lose and a lifetime of investing better to gain – join us today! I look forward to hearing from you on the Discussion Boards!

Curious to see how the media spins tomorrow’s BlackBerry report,
Iain Butler, CFA
Chief Investment Adviser, Motley Fool Canada

Disclosure: Iain Butler is long January 2017 $13 call options on BlackBerry.

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