It is an important exercise to periodically review our stock holdings as well as those stocks that are on our watch lists. This review should happen at least once a year, but also when big stock price movements are noticed.
BlackBerry’s (TSX: BB)(NYSE: BB) stock price has certainly been full of volatile movements for many years now. Years ago, BlackBerry was in complete disarray and running out of cash. CEO John Chen’s strategy to back away from the consumer handset market and focus on the “Internet of Things” and cybersecurity industries was in its infancy.
Today, we are still waiting to see if BlackBerry’s transformation will fully succeed, but in my view, the early signs are positive. I think BlackBerry’s stock price gain of 13.9% in December is just the beginning.
So, why did BlackBerry’s stock price rise in December?
Third-quarter results exceeded expectations
Third-quarter EPS came in at $0.03 compared to the $0.02 consensus expectation. This represents the fourth consecutive quarter that BlackBerry has met or exceeded expectations, and this is a good thing for a company that has too many missed quarters in its recent history.
Licensing revenue (27.5% of revenue) was strong again in the quarter, growing 8% sequentially and 13% year over year. Recall that licensing revenue is recurring, so it makes up an attractive and desirable part of BlackBerry’s total revenue.
Although BlackBerry’s Cylance acquisition disappointed versus expectations again in the latest quarter, it grew 4% versus last quarter and 13% year over year. Let’s recall that BlackBerry’s $1.4 billion acquisition of Cylance, a next-generation cybersecurity provider, currently represents 19% of revenue and is BlackBerry’s real entrance into the cybersecurity industry. There is big upside in BlackBerry stock as a result of the tremendous upside that exists in the cybersecurity industry as well as in BlackBerry’s growing expertise in this area.
BlackBerry management is reiterating fiscal 2020 estimates
Although there are many moving parts, and we are still waiting for higher growth from BlackBerry’s Cylance and Enterprise Software and Solutions businesses, management is reiterating their confidence that 2020 results will be in line with expectations.
Again, for a company that has a history of missing expectations, this goes a long way in restoring confidence in the market.
BlackBerry stock remains undervalued
Given BlackBerry’s strong balance sheet and its high-growth potential, the stock is still trading at undervalued levels. BlackBerry stock trades at 1.4 times book value and just over three times sales. The company remains in a net cash position of $388 million as of the end of the most recent quarter and is free cash flow positive.
Foolish bottom line
BlackBerry certainly has momentum on its side at the moment. With the company’s transformation continuing to play out (notwithstanding all its hurdles and hardships), the market is beginning to realize the strong potential for BlackBerry’s businesses and its stock price.
In closing, I would like to remind Foolish investors of our belief in holding great businesses for the long term. While this belief remains intact, we are also aware that sometimes short-term stock price movements create opportunities to create wealth. By blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.
