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It’s Time for a BlackBerry Ltd (BB) Renaissance; Smartphone Giant Seasoned for New Gains


Summary

BlackBerry Ltd (NYSE:BB) fiscal Q3 2017 revenue beat out estimates, marking the second consecutive quarter in which the smartphone giant surpassed earnings expectations.

BB’s software and services business made significant headway into regulated and enterprise segments and we see considerable growth potential in coming quarters.

BB’s management is focused on rebranding the company from being a hardware brand to a software giant in cybersecurity niche and the strategy seems to be working.

BB’s stock price has gained 68% since the start of 2017 and it has a price target of $14.41 per share, which still offers 24.22% upside potential.

Introduction

Figure 1: BlackBerry Limited’s Stock Price Went Up by Over 68% Since the Beginning of 2017

BlackBerry’s stock price has remained high throughout in 2017, making bulls upbeat on the Street. To date, it went up by 68.36% to $11.60 per share. The recent positive momentum started steamrolling after BlackBerry released its fiscal Q3 2017 quarterly financial results, where the management team demonstrated growth potential in BB’s software and cybersecurity segment. In fact, software and services revenue comprised almost 85% of the total Q3 revenue of the company.

Despite the recent rapid-fire momentum, we believe BlackBerry’s stock still offers even more upside potential in the coming months and based on our analysis, long-term investors should consider increasing their exposure to this born-again brand of a forgotten era.

Takeaway from Recent Financial Performance

Figure 2: BlackBerry Limited Earned $226 Million in Q3 2017

In Q3 2017, BlackBerry Limited earned a total $226 million GAAP revenue and $235 million non-GAAP revenue. Compared to Q3 2016’s $301 million revenue, this year’s Q3 revenue went down by 21.92%. However, their Q3 2017 revenue turned out to be $19.58 million higher than Street-wide expectations. This is the second consecutive quarter where BlackBerry Limited beat consensus revenue forecasts as in Q2 2017, the giant turned out an impressively quarterly revenue that soared $29.09 million higher than the Street at $249 million.

Figure 3: BlackBerry Limited Maintained a Steady Gross Profit in 2017

BlackBerry Limited’s quarterly gross profit remained relatively stable in 2017 as the company managed to post a gross profit of around $150 million in the last three quarters of the year, where its Q3 gross profit hit $168 million.

However, BlackBerry Limited’s net income has fluctuated a lot in 2017. After management shifted focus from a once solely mobile hardware marketer to a cybersecurity and software company, the giant’s profits gradually increased, spiraling up to nearly $700 million in Q1 2017. Despite maintaining steady revenues and gross profit, in Q3, BB produced a net loss of $275 million.

Figure 4: BlackBerry Limited’s Gross Profit Margin Remained at 74.34%, but Profit Margin Came Out at -122% in Q3 2017

The huge loss of $275 million translated into a -122% profit margin in Q3, as opposed to the healthy gross profit margin of 74.34%.

Why We Are Optimistic About BlackBerry

During the Q3 2017 earnings call John Chen, the CEO of BlackBerry Limited, said that “delivered record software and services revenue of $199 million, which represent 85% of our total company revenue and led to a record gross margin on the company level of 77%.” Although Chen didn’t comment about the growing net losses in Q3, what he tried to communicate to investors is a growth story in the software segment, and we believe he has good reasons to be optimistic about the future of the company.

BlackBerry as a brand stood for the highest quality hardware and software in the mobile industry for decades. Meanwhile, over the last few years, the company has made significant headway into the regulated market. Especially in the enterprise segment, BlackBerry Limited demonstrated significant momentum in Q3 and delivered year-over-year double-digit billings growth.

Most investors already jumped ship while BlackBerry Limited’s hardware business was taking a nosedive in the last few years, and those who currently own the stock are still on board, betting on the software and cybersecurity segments of the business. These investors already understand the risk, still bidding up the price of BlackBerry stock. Hence, these bullish investors remain unconcerned about what happened in the past, opting to focus instead on the future growth prospects of the company in this regulated and enterprise niche; one in which BlackBerry  seems to be gaining momentum. Based on this growth story, we believe there is more good news to come in the coming year, giving us cause to be quite positive about this company and the stock’s prospects lying ahead.

Conclusion

While BlackBerry continues to grow as a software company focused on cybersecurity, managing to post a record 74% GAAP gross margin, the giant’s net loss for the quarter nonetheless landed at $275 million- something management needs to address in the coming quarters to keep up with its comeback momentum. If investors see no improvement in the bottom line, the renewed enthusiasm about this relic from pre-Android era smartphones will have a hard time convincing the market that this turnaround story will be sustainable in the long-run.

BlackBerry Limited currently has a price target of $14.41 per share and based on the current market price of $11.60, it offers a 24.22% upside potential to investors. Hence, it is recommended that long-term investors consider the growth potential of BlackBerry in the software and cybersecurity segments as well as boost exposure.

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