Seeking Alpha: BlackBerry: Reddit Won't Save This Stock BlackBerry: Reddit Won't Save This Stock
May 31, 2021 12:05 PM ETBlackBerry Limited (BB)15 Comments
Summary
BlackBerry was one of the "meme stocks" that rose dramatically in January and February of this year, only to fall again later.
More recently, it went on a smaller rally, rising 18.9% in four days.
The move coincided with an uptick in posts on Reddit's r/WallStreetBets, which may have contributed to the rally.
In this article, I present a bearish thesis on BlackBerry, arguing that Reddit promotion isn't enough to save the stock from the negative revenue growth that appears poised to continue.
Empty cockpit of autonomous car, HUD(Head Up Display) and digital speedometer. self-driving vehicle.
Photo by metamorworks/iStock via Getty Images
BlackBerry (BB) is fresh off its second sharp and sudden spike of the year. Last week, it rose 18.9% from Tuesday to Friday, mirroring an earlier rally that took it up 237% in a month. The more recent rally was tamer, but it definitely got people talking. Mentions of BlackBerry have spiked once again on Reddit's WallStreetBets, in threads like:
"BB Gains."
"Really Need a Big Move from BB."
"1 million in BB, let's see what happens."
WallStreetBets has 10.2 million readers; a group of people that large can easily move markets, even if they're not particularly rich individually. If you had 10 million people all invest $100 in a stock, that would be $1 billion invested - enough to move the price of a medium-cap stock. And some WallStreetBets investors claim to be investing a lot more than $100.
It could well be that, in the short term, Reddit will succeed in sending BlackBerry to the moon. But the effect will be short-lived. If a stock has nothing going for it other than promotion on a forum, it will begin to decline in price once the posters lose interest. In this article I'll present a bearish thesis on BlackBerry, arguing that its popularity on Reddit isn't enough to compensate for its deteriorating fundamentals, which look poised to continue deteriorating into the future.
Competition: A Significant Force
When analyzing any stock, it helps to look at the competitive landscape it operates in. That gives you a sense of what it's up against, and how easy or hard it will be to reach a high market share.
On the surface, BlackBerry seems to be positioned in the right industries. It is involved in cybersecurity, internet of things (IoT) and car software - all of which are growth industries. According to Grand View Research, the projected CAGR growth rates in BlackBerry's three main sub-sectors are:
Cybersecurity - 10.9%.
IoT: 29.4%.
Car software: 17.1%.
That's all well and good. The problem is that BB faces enormous competition in all of these industries from bigger, better-funded companies. These include:
Broadcom (AVGO) - endpoint security.
Cisco Systems (CSCO) - IOT security.
Alphabet (GOOGL) - car software.
All of these companies are bigger and have more engineering resources than BlackBerry does. That doesn't mean they'll necessarily run it out of business, but it does mean that BlackBerry faces an uphill battle. Just recently, Ford (F) dropped BlackBerry's infotainment offering for Google's competing service. Enough customers ditching QNX for Google software could easily erode BlackBerry's market share. And car software is just one of several software niches that BlackBerry faces significant competition in.
BlackBerry's Growth and Earnings
Another big problem for BlackBerry is that its earnings results haven't been great, and they could get much worse in the future. In BB's most recent quarter, the results were:
Revenue: $210 million, down from $282 million.
Gross margin: 72.4%, down from 75%.
Operating expenses: $465 million, up from $253 million.
Net income: $-315 million, compared to $-41 million.
EPS: $-0.56, compared to $-0.07.
Broadly, we've got expenses going up, and revenue going down. And the long-term averages aren't much better. According to Seeking Alpha Quant, BB's five-year CAGR growth rates in revenue, EBITDA and levered free cash flow are:
Revenue: -16%.
EBITDA: -8.3%.
Levered free cash flow: -33.8%.
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These aren't particularly encouraging metrics. BlackBerry likes to tout the fact that its recurring software revenue is rising, but even that was called into question in Q4. In that quarter, BB's software and service revenue fell to $160 million, from $170 million a year before. Worse still, BlackBerry's earnings could continue to decline going forward as I'll show in the next section.
Looking Forward to the Near Future
As we've seen already, BlackBerry's growth rates were negative in the most recent quarter, and annualized over five years. That in itself is alarming, but not necessarily fatal; a company can turn its fortunes around. Many BB analysts tout the company's "revenue stabilization"; the decelerating rate of revenue decline. The theory is that eventually BB's revenue with flatten and then begin to inch upward. If a specific catalyst were to drive BB's revenue higher (say, a lucrative new partnership), that could happen. But it's no guarantee. So, let's take a forward look at BlackBerry's possible earnings under two broad scenarios: continued revenue declines and renewed revenue growth.
Scenario 1: Revenue Continues to Decline
BlackBerry's rate of revenue decline was 34% YoY in the most recent quarter. The rate of decline has decelerated from previous quarters. So, I will figure a conservative 20% rate of decline - lower than what we saw in Q4, and the 10 year annualized rate. Here's what we get with expenses unchanged:
Q4 2021 Q4 2022 Q4 2023 Q4 2024 Q4 2025
REVENUE $210 million $168 million $134 million $108 million $86 million
EXPENSES (cost of sales + operating expenses) $523 million $523 million $523 million $523 million $523 million
OPERATING INCOME $-313 million $-355 million $-389 million $-415 million $-437 million
As you can see, with a 20% annualized revenue decline, we get a $313 million operating loss that grows to $437 million over four years. The results would be different if expenses rose or fell. The following are the results I got using the same revenue figures but with expenses rising or falling 20%:
Expenses rise 20% per year: a $-1 billion operating loss by Q4 2025.
Expenses decline 20% per year: a $-128 million operating loss by Q4 2025.
As you can see, even in the scenario where BB's expenses fall in tandem with revenue, we end up with a loss albeit a smaller one. But we're not done yet. We still need to consider what would happen if revenue grew.
Scenario 2: Revenue Grows
There are a number of scenarios that could cause BlackBerry's revenue to grow. The impact here is harder to quantify because we do not have a historical trend to inform us - the long-term trend is one of decline. For BlackBerry to experience positive revenue growth it would need to hit an unexpected catalyst, the impact of which can't be quantified. We do know, however, that if BlackBerry's revenue started growing, expenses would rise too - because servicing new clients requires additional expenditure. Here are the results we get if BlackBerry's revenue grows by 20% per year and expenses also grow by 20%.
Q4 2021 Q4 2022 Q4 2023 Q4 2024 Q4 2025
REVENUE $210 million $252 million $302 million $363 million $435 million
EXPENSES $523 million $627 million $753 million $903 million $1084 million
OPERATING INCOME $-313 million $-375 million $-451 million $-540 million $-631 million
As you can see, we get an escalating rate of losses under this scenario as well. If we assume only 5% expense growth, then the losses shrink rather than grow - but you still get a $200 million loss after four years. Under none of the scenarios I've looked at revenue declines and revenue growth, taking into account positive and negative possibilities for expenses - do we get to a GAAP profit by 2025.
Value Metrics
BlackBerry has very high value metrics for a company experiencing negative growth. Some of BlackBerry's value metrics are low (i.e. good) compared to other tech stocks, but not compared to companies with negative earnings growth rates. Here's what Seeking Alpha Quant has on file:
Price/book: 4.56.
Non-GAAP P/E: 55.
Price/sales: 7.6.
EV/sales: 6.5.
Price/cash flow: 83.
None of these ratios inspire enthusiasm. You could perhaps describe the price/book and price/sales ratios as "low for a tech stock." But the reason people tolerate high multiples in tech stocks is because they're expected to deliver superior growth, which BlackBerry isn't doing. If we compare BB's multiples to growth rates instead of industry averages, then they look very, very high. And as I showed in an earlier section, BlackBerry's earnings are likely to decline even if its rate of revenue decline decelerates.
Risks and Challenges
So far, in this article, I've outlined a bearish thesis on BlackBerry, arguing that it faces stiff competition while having inferior earnings results and a steep valuation. In a sense, we have already looked at many "risks and challenges" pertaining to BlackBerry stock. However, we still need to consider the risks and challenges to the bearish thesis itself. BlackBerry stock is extremely popular on investing forums, and that kind of "cult" status can defy fundamentals for a surprisingly long time. With that in mind, here are three key risks that anybody looking to short or even just sell BB stock should keep in mind:
Continued positive mentions on Reddit. The subreddits where BlackBerry gets talked about are massive, and some of the posters there claim to buy in multi-million dollar lots. Stock prices are ultimately a function of supply and demand, and the kind of hype BlackBerry has been getting lately can drive a lot of interest. Normally, earnings drive stock prices in the long run. But hype can keep a train rolling for longer than some people think.
A game changing contract. BlackBerry is an enterprise software company, meaning it makes its money off a relatively small number of clients, each paying a large amount of money every year. Such a company locking down a very juicy contract could easily change its fortunes quickly. If BlackBerry got a software consulting contract worth $1 billion per year, that would make all the negative growth rates I mentioned earlier disappear overnight. And that's not unheard of. Palantir (PLTR) has $1.5 billion in U.S. federal government contracts alone, and many defense contractors have individual contracts worth hundreds of millions.
Acquisition. BlackBerry has a lot of valuable IP, some of it left over from its smartphone days. The company has leveraged this to gain legal wins over larger companies. For example, it recently reached a settlement with Facebook (FB) on instant messenger patents. Such a company would make a valuable acquisition target for a competitor, even with its lackluster performance. If BlackBerry were acquired at a premium price, it could result in a situation where shorts have to cover their positions with no hope of the price ever falling again. Once an M&A deal is near closing, the stock price typically stays near the acquisition price.
The Bottom Line
The bottom line on BlackBerry is this:
It has a lot of fans that are eager to jump on buying opportunities, but not much else. It faces a lot of competition. Its growth rates in revenue, earnings and cash flow are long-term negative. Finally, earnings are likely to keep declining even if the negative revenue growth rate decelerates. Quite frankly, the stock just doesn't have much to offer someone who views it as an investment in a business. Over the long term, Reddit probably won't be enough to save it.
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