BlackBerry Limited (BB) will report its third-quarter (ended November 30, 2023) results on December 20, 2023. While the company’s quarterly revenue is expected to increase over the prior-year quarter, its loss per share is expected to narrow.
In this piece, I have discussed why it could be prudent to avoid the stock now.
BB’s revenue in the third quarter is expected to increase 7% year-over-year to $180.80 million. Its loss per share for the same quarter is expected to narrow 40% year-over-year to $0.02. Looking back, although BB beat analysts’ EPS estimates in the last reported quarter, it failed to surpass the consensus revenue estimates.
Commenting on the second quarter, BB’s Executive Chair and CEO, John Chen, said, “We expect a strong finish for IoT revenue this fiscal year, with the fourth quarter forecasted to be the strongest ever.”
BB’s third-quarter revenues are expected to be supported by the growing demand for its cybersecurity solutions. Its revenues are also likely to be bolstered by its IoT segment. Meanwhile, investors will be keenly following how the management intends to restructure costs and when the company expects its cash flow to break even.
On November 17, BB announced a long-term software and services agreement to strengthen Malaysia’s cybersecurity posture. The deal will enable the Malaysian government to leverage the full suite of BB’s cybersecurity solutions.
On October 11, BB announced that the United States Department of Homeland Security (DHS) awarded BB a new seven-year Indefinite Delivery, Indefinite Quantity (IDIQ) contract for the creation and maintenance of its new Super Enterprise for Personnel Emergency Notification System (PENS).
RBC’s Paul Treiber believes that BB’s revenue could rebound in the third quarter, assuming the closure of the postponed Cybersecurity deals and the ramp-up in its IoT revenue. He said, “If slipped Cybersecurity deals do not close, or IoT does not ramp as expected, 3Q could fall short of our estimates and consensus.”
RBC forecasts BB’s third-quarter IoT revenue to rise 14% sequentially to $56 million. Treiber said that with BB no longer considering an IPO of its IoT business, the company is likely to consider other alternative sources of financing.
BB’s stock has declined 18.6% over the past six months and gained 27.3% year-to-date to close the last trading session at $4.15.
Here’s what could influence BB’s performance in the upcoming months:
Disappointing Financials
BB’s revenue for the second quarter ended August 31, 2023, declined 21.4% year-over-year to $132 million. Its adjusted gross margin decreased 19.6% over the prior-year quarter to $86 million. The company’s adjusted net loss narrowed 20.7% year-over-year to $23 million. Its adjusted EBITDA loss widened 37.5% year-over-year to $22 million.
Mixed Analyst Estimates
Analysts expect BB’s EPS and revenue for fiscal 2024 to increase 111.1% and 35.3% year-over-year to $0.02 and $887.25 million, respectively. On the other hand, its EPS and revenue for fiscal 2025 are expected to decline 57.4% and 14.3% year-over-year to $0.01 and $760.10 million, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, BB’s 246.73x is 916% higher than the 24.28x industry average. Likewise, its 2.74x forward EV/Sales is 4.5% higher than the 2.87x industry average. Additionally, its 76.04x forward EV/EBITDA is 389% higher than the 15.55x industry average.
On the other hand, in terms of forward Price/Sales, BB’s 2.73x is 7.5% lower than the 2.95x industry average.
Weak Profitability
BB’s trailing-12-month net income margin is negative 66.91% compared to the 2.35% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 51.13% compared to the 1.13% industry average. Furthermore, the stock’s 0.41x trailing-12-month asset turnover ratio is 33.2% lower than the industry average of 0.62x.
Poor Historical Growth
BB’s Tang Book Value has grown at a negative 39% CAGR over the past three years. Its revenue has grown at a negative 6.6% CAGR over the past three years. Its total assets have grown at a negative 20.2% CAGR during the same period.
POWR Ratings Reflect Bleak Prospects
BB has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BB has a D grade for Growth, which is in sync with its poor historical growth. Its weak profitability is consistent with its D grade for Quality.
BB is ranked #42 out of 46 stocks in the Technology - Communication/Networking industry. Click here to access BB’s Value, Momentum, Stability, and Sentiment ratings.
Bottom Line
Although BB’s revenue is expected to rise during the third quarter owing to higher IoT and Cybersecurity revenues, IoT revenues could struggle to ramp up in the near future due to EV and software investment deferrals by several OEMs. Moreover, although the prospects of the cybersecurity industry look promising, the company faces intense competition from larger cybersecurity peers.
Therefore, given its disappointing financials, poor historical growth, and weak profitability, it could be wise to avoid the stock now.
Stocks to Consider Instead of BlackBerry Limited (BB)
The odds of BB outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A (Strong Buy) and B-rated (Buy) stocks from the Technology - Communication/Networking industry instead:
Gilat Satellite Networks Ltd. (GILT)
Ceragon Networks Ltd. (CRNT)
Eutelsat Group (ETCMY)
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
BB shares were trading at $4.23 per share on Tuesday morning, up $0.08 (+1.93%). Year-to-date, BB has gained 29.75%, versus a 25.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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