Hold BlackBerry (NYSE:BB) | Seeking Alpha

Investors who accumulated shares of BlackBerry (BB) over the years will have to wait longer before getting rewarded. The company’s pivot from its iconic mobile paging dominance a decade ago and towards enterprise software is not yet paying off. In 2020, bulls would point to the relative overvaluation of CrowdStrike Holdings (OTC:CRWD) to argue that BlackBerry shares were worth more. But CrowdStrike’s strong business growth justifies the lofty price-to-earnings multiples.

BlackBerry is still a “show me” story.

Favorable Software Sales Mix

The company has come a long way from shifting its revenue from hardware to software. In FY2014, software and services accounted for 3% of the $6.8 billion in annual revenue. In FY2020, nearly all of BlackBerry’s $1.1 billion revenue comes from its mobile software from Good, WatchDox, and Secusmart.

Image courtesy of Blackberry

Cylance, along with its Unified Endpoint Management, will be referred to as the Spark platform. Unfortunately, the unit showed no spark of growth in the quarter. Still, it added 279 new customers. New active subscription customer growth topped 15%. These figures will be of limited help for investors trying to calculate the unit’s contribution to profits. Furthermore, shareholders will have to adjust the $594 million non-cash goodwill writedown in the just-reported Q1/2021 quarter.

USD in Millions

18-Nov

19-Feb

19-May

19-Aug

19-Nov

20-Feb

20-May

CAGR

Current assets

Cash

2,318

916

847

849

882

909

874

-34.40%

Goodwill

564

1,463

1,458

1,458

1,459

1,437

843

19.10%

Long-term debt

665

665

790

762

627

627

627

-9.40%

Data courtesy of Stock Rover

From the balance sheet above, notice the cash on hand declining by 34% compounded annually since fiscal 2018. Goodwill is now back at levels not seen since before several of BlackBerry’s acquisitions. Long-term debt is mostly unchanged in the $627 million range.

Unless BlackBerry sells debt or stock to raise cash, investors no longer have to worry about expensive acquisitions that are not adding to the company’s growth prospects.

Growth Forecast

Due to the slow uptake of Cylance, BlackBerry’s software and services revenue will not grow by more than 10-15%. Not a single analyst has a “Buy” rating on the stock. Nine rate the stock as a “Hold,” with an average price target of $5.43 (per TipRanks). More recently, two analysts assigned a price target that implies a 1-year return of between 25.26% and 46.14%:

(Source: TipRanks)

Investors may build a 5-year discounted cash flow growth exit model to come up with a fair value. Assuming an unlevered free cash flow 5-year CAGR of -6% and the following metrics, BB stock has over 30% upside:

Model courtesy of FinBox

My forecast makes two major assumptions. First, I assume EBITDA as a percentage of revenue jumps to 25%. Second, assume that revenue grows by 15% in FY 2022-2023:

Opportunity

Slow sales of Cylance is a near-term headwind for BlackBerry shareholders. But on the company’s conference call, CEO John Chen said: the product demonstrates “that our AI-led solution and managed service Protect customers from global threat efforts, we were especially pleased by the performance of optics. We surpassed many EDR players who happen to be ranked above in the industry analyst report.”

Effective threat detection that applies artificial intelligence may separate Cylance from the other endpoint detection and response (“EDR”) suppliers. VMware’s (VMW) Carbon Black and SolarWinds’ (SWI) EDR are a few of BlackBerry’s competitors.

Charts Suggest a Sell

BlackBerry’s moving average convergence divergence crossed over to a “Sell” on Friday, June 12, 2020:

Chart courtesy of Stock Rover

For what it’s worth, I am not a chart reader. The Sell signal for the stock could quickly reverse and become a Buy signal next. Investors will have to wait another three months. If the company reports better revenue, not just installation counts, from its IoT division, and Cylance sales jump, the stock will rebound.

Your Takeaway

BlackBerry will need Cylance revenue growing at double the rate it forecasts for this year. This is not impossible, but it is unlikely. Investors who bought BB stock should continue holding it. Shares are inexpensive at current levels.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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