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BlackBerry Ltd.: Should You Buy, Sell, or Hold?

BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) delivered better-than-expected profits in its latest earnings release, but the market still can’t decide if Canada’s favourite turnaround story is going to have a happy ending.

Let’s take a look at the current situation to see if BlackBerry deserves a spot in your portfolio.

Financials

BlackBerry surprised the market with net profit of $28 million, or five cents per share, in the March 27 statement, compared to a loss of $148 million a year ago.

The company delivered positive cash flow of $76 million and finished the quarter with $2.9 billion in cash and short-term investments. Long-term debt was $1.7 billion. The earnings and cash flow numbers sound good, but most of the positive impact came from cost controls.

On the revenue side, the story was quite different. Sales dropped to $660 million compared to $793 million last year, a 32% slide that missed analyst estimates by a wide margin.

Efforts to monetize the company’s BBM service are not bearing fruit as quickly as expected and total handset sales came in at just 1.6 million units.

On the positive side, the average revenue per handset rose to US$211 compared to $180 in the previous quarter, and CEO John Chen said he expects the number to continue to move higher. The new high-margin offerings, such as Passport and Classic, accounted for 90% of the handsets sold.

Software still only represents about 10% of the company’s total revenue, but the division saw a nice 20% year-over-year pop, hitting $67 million.

The shares initially rose when the earnings came out, but have since continued to slide, and are down more than 15% in the past month.

Outlook

Management has done a great job of reducing costs and getting the company into a situation where it can consistently deliver positive cash flow. The large cash position gives BlackBerry some acquisition capabilities as it transitions to a software-focused player.

Devices are still a key part of the business and the new handsets are gaining some traction in the market, but it is too soon to tell if they will ultimately be successful and profitable.

Software sales are improving and there has been some good news coming out of the Internet of Things (IoT) initiative, but the IoT market is still in its infancy and the big global IT companies are all planning to capitalize on it. IBM just announced a $3 billion IoT program.

What should investors do?

BlackBerry is stabilized and delivering positive cash flow. The turnaround appears to be on track and the company only needs to carve out a profitable niche in the massive IoT space to be successful, but it is easy to see why the market is so divided on the company’s long-term prospects.

At this point, the downside risks should be minimal and investors have a shot at some serious gains if John Chen and his team manage to achieve their goals.

BlackBerry is a contrarian bet, and I wouldn’t put a lot of money into the stock, but the odds of success look better now than they have in quite a while.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.

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