Trade Alert: A cheap play on autonomous cars, IOT, cybersecurity, IP…
I’ve been hard at work analyzing several Revolutionary Growth sectors and the best risk/reward stocks in them and I’ve got one I want to get a toe into today.
Blackberry, a stock that long-time subscribers will remember that I was short from around $100 til I covered in the $20s or so a few years ago, looks like a compelling long-term risk-reward investment here from the other side — the long side. As in, I’m nibbling on a small first tranche, buying maybe ⅓ of a full-sized position here in some Blackberry common stock. I’m also throwing a tiny bit of capital at some Blackberry call options that expire out in September with $11 strike prices. They’re not terribly expensive at $1.05 or so. Blackberry reports earnings tomorrow morning before the open, and if they bomb, the call options will drop in value sharply tomorrow and, as with all options, could end up worthless when they expire in September even if the long-term investment of Blackberry ends up being a five-bagger over the next five years or something.
Those of you who hang out in the Trading With Cody Chat Room know @spekoliunas, as the very helpful moderator. He’s also a great analyst and he’s been covering Blackberry and has been the long the stock for the last few months. His real name is Žilvinas Speteliūnas and I had him assist me writing the following report on why I’m buying some Blackberry common stock as new Revolution Investing kind of play.
BlackBerry positions itself in a very promising and high growth markets:
- Internet of Things/Enterprise of Things
- Connected Car/Autonomous Driving
- Exposure to Mobile Security/Cybersecurity
- Unified Endpoint Management
BlackBerry DNR is security and they want to leverage that into different verticals. QNX is a cornerstone here.
Cybersecurity/Android/Autonomous Cars in the same package.
BlackBerry DNA is in security and they want to leverage that into IoT. Likewise, Blackberry’s Android handsets are built upon a security-first layer which could very well make Blackberry Android’s the de facto standard for corporate Android smartphone users.
Blackberry’s QNX technology is already imbedded in millions of cars today and is also built on a highly-secure platform, unlike traditional Android. Connected/self-driving cars will be like the computers on the road and you certainly don’t want it to be hacked. BlackBerry’s strategy is to offer the most secure car platform on the market. And they have a strong start position to do that with QNX being a dominant player in the infotainment market.
Lots of cash.
$2.04B net cash (36% of market cap), $2.64B total cash
After the last quarter, BlackBerry had around $1.7B in total cash and $1.1B in net cash. Qualcomm was ordered to pay BlackBerry $815M in an arbitration settlement last April. In May BlackBerry and Qualcomm have reached a final agreement amount of $940M. Qualcomm paid the full amount at the end of May.
Improving Fundies.
Let’s take a look at fundamentals. The only problem is declining revenue, but I believe revenue are at the lowest point during this turnaround cycle and will start to growth in upcoming quarters.
– 39 000 patents
– Net cash 36% of market cap
– Positive FCF in last 13 quarters
– Positive adjusted EBITDA in last 13 quarters
– Record high non-GAAP and GAAP gross margins
– Expects to achieve non-GAAP EPS profitability for the full year
– Software and Services revenue are 67% of total
Great CEO.
Current CEO John Chen is a turnaround expert and highly respected CEO. I highly recommend to read this article how John Chen turned around Sybase in 12 years.
http://www.itworld.com/article/2758499/mobile/sybase-ceo-john-chen–tale-of-a-turnaround.html
When Chen took over Sybase, it was almost dead company, losing business to Oracle and other competitors. Under Chen’s leadership Sybase achieved strong financial performance:
– Market cap went from $362M to $5.8B through 2010 ( that’s 1502% increase in 12 years!)
– 55 consecutive quarters of profitability
– $2.8B of cash generated
– Sybase was acquired by SAP. in 2010
Why might BlackBerry beat the estimates tomorrow?
Wall Street Consensus: EPS of 0.00, revenue of $264.5M. That’s really conservative estimates. BlackBerry has done a great job keeping costs down, while total revenue declined. In fact, BlackBerry has beaten EPS estimates in last 6 quarters and in last 4 quarters EPS didn’t go below 0.
BlackBerry non-GAAP revenue in last quarter:
Software and service = $193M (80% recurring)
Mobility solutions = $55M. BlackBerry partners released a few phones this year and they just went on sale in Q2. This should boost the amount of royalties paid to BlackBerry in Q2. I am expecting Mobility Solutions to be stable or slightly higher than in Q1.
Service Access Fee (SAF) = $49M. It is constantly declining business and eventually should get to 0.
So even if we assume that software and services/mobility solutions won’t grow this qtr and SAF revenue will get cut in half, we get $272M revenue. But I am expecting sequential growth in both software/service and mobility solutions, then revenue should be around $280M, 6% higher than consensus.
Most analysts aren’t projecting any revenue growth for next year and little revenue growth in years ahead. Any meaningful revenue growth from any meaningful traction in becoming a de facto standard in autonomous car brains, safe Androids, etc, would give the stock 5-10-fold potential. Of course, if they fail to grow again, the stock will likely be well back into the single digits in another year or two. That’s the risk/reward scenario for this potentially-once-again Revolutionary company.
