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As BlackBerry Ltd. Falters, Time to Sell?

Shares of BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) plunged 11% on Friday after the company announced its quarterly earnings report for the three months ended May 31, 2017.

Although the company has managed to beat analyst estimates on the earnings part, BlackBerry wasn’t anywhere close to meeting analyst projected revenue figures.

Revenue for the quarter, at US$235 million, was 11% lower than the US$264.39 million consensus analyst estimate for the period.

Helped by the Qualcomm arbitration award earlier in the quarter, the earnings release document looked better, showing a nice US$671 million net profit, which compared better against a US$670 quarterly loss reported for the same period last year.

Revenue hasn’t grown the way investors want it to, and operating costs aren’t reducing any further. It seems like costs have already bottomed, and the only way to improve the company’s situation is to generate more business and convert more client deals.

There is hope in CEO John Chen’s promise of a 10-15% business growth until May 2018, but that was not enough to allay shareholder disappointment, and the stock price tumbled by the widest margin in two years.

A revenue miss might not be the only problem worrying investors though.

A big concern is about the announced share-buyback program in which BlackBerry plans to buy back some 31 million shares from its shareholders.

Management may pay out about US$310 million (if buying at a current average price of US$10 a share) back to the market. This may reduce the outstanding share numbers on the balance sheet and all share-based valuation metrics, like the common earnings per share, may look better — even if absolute results do not improve next quarter.

The move will reverse some dilutive effects of employee stock compensation schemes and any debenture conversions, but the company could have prioritized deeper value-creation issues.

I was hoping that such a large cash injection into the firm would be used to make further value-enhancing investments, like an acquisition in the connected car or autonomous driving space, where the company is now heading, so as to beef up its arsenal in the new market.

BlackBerry may finally make a new investment in the area as the CEO noted when one investor asked about the possibility of a dividend to shareholders during the Annual General Meeting on June 21, but that US$310 million could have been put to a more productive use than a share buy back.

The market could be rightly justified in punishing the stock today.

Time to sell?

BlackBerry stock is beaten down today, but this could be a second chance for bullish investors to jump in to the stock at a cheaper valuation.

The firm could unlock new revenue streams as it expects to further licence its software to gadget manufacturers of televisions, wearables, and related items as the CEO mentioned during the recent shareholder meeting.

Moreover, John Chen has confirmed the new Qualcomm deal for QNX software to be included in the chip maker’s processors. The new Qualcomm technology is expected to be used in the self-driving systems of the future. This is a huge plus for the company as it hopes to play a significant role in the connected and autonomous driving car market.

Then there is the talk of a possible takeover that could send the company’s stock into the sky. It’s a possibility the new auto industry is shaping up. Buying the rumour and selling the news could pay out handsomely, but there is risk that the rumour may not come true.

Happy investing.

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Fool contributor Brian Paradza has no position in any stocks mentioned. Tom Gardner owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm.

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