BlackBerry (TSX:BB)(NYSE:BB) stock has been a test of patience for investors. The Canadian tech company exited the smartphone market a few years back and pivoted to enterprise software. The once leading smartphone maker also saw its stock price fall from a record high of $245 a share in July 2007 to a multi-year low of $3.94 in March 2020.
Investors were hoping that BlackBerry would be able to successfully pivot and evolve into a market-leading provider of enterprise software solutions. However, the stock has continued to move lower and declined by 63% since the start of 2018.
BlackBerry stock is currently trading at $6.66 per share and let’s see if the company can overcome the ongoing weakness and mount a market-beating rally by the end of 2020.
Blackberry impacted by the COVID-19 pandemic
While several technology stocks have been largely immune to the COVID-19 pandemic, BlackBerry has missed the recent tech rally. It has been hurt by the COVID-19 induced weakness in the automobile sector which led to a revenue decline of 20% in its fiscal first quarter of 2021. BlackBerry reported sales of US$214 million, below Wall Street estimates of $216.8 million in Q1.
BlackBerry’s QNX business, which caters to the automotive sector experienced a pullback in royalty sales. The company’s gross margins also declined to 69% and similar to peers, BlackBerry did not provide any guidance for the upcoming quarters. Its tepid results coupled with macro-economic uncertainty did not sit well with investors.
In Q1, BlackBerry reported a goodwill impairment charge of $594 million, related to the Cylance acquisition. The Cylance segment saw sales decline by 4% year-over-year which again is a matter of grave concern. The endpoint protection market (where Cylance aims to be a major player) is forecast to grow at an annual rate of 7.6% through to 2024, which means Cylance is losing market share in a fast-growing vertical.
What’s next for investors?
BlackBerry believes it can grow sales by double digits once the pandemic is over. It also wants to expand operating margin to between 20% and 25% compared to a paltry 1% in Q1. However, investors should also note that the company has been a perennial underperformer for several years and has failed to live up to expectations.
Its low valuation remains unattractive due to the company’s inability to successfully pivot into enterprise software. Even if the company manages to stage a turnaround and grow its top-line at an enviable pace, it will have to reinvest heavily in research and development which means its profit margin projections will not be met.
BlackBerry’s end markets have taken a major hit amid the pandemic and the recovery might take longer than usual. If the pandemic continues to worsen, BlackBerry’s numbers will be under pressure.
As Fool contributor, Joey Frenette states, “Even before the pandemic disrupted BlackBerry’s end markets, the ever-evolving turnaround story was tough for most investors to understand and value. There were a lot of moving parts in the company that were further complicated by acquisitions.”
The Canadian and U.S. markets have a multitude of tech stocks that are better than BlackBerry. If you want to invest in beaten-down stocks that are undervalued look at companies that continue to generate predictable cash flows instead of investing in a corporation that is struggling with falling margins and sluggish sales.
