Blackberry's  (BB) - Get Report  shares have gone essentially nowhere the past seven years. Its most recent fiscal Q1 2020 results gave the illusion of BlackBerry's turnaround gaining traction, but on deeper analysis, there are ultimately still too many questions unanswered. Consequently, despite superficial improvements, Blackberry's shares are not cheaply priced and remain in speculative territory.

The Final Arrow

Last year when BlackBerry reported its fiscal Q1 2019 results, BlackBerry carried approximately $1.5 billion of net cash. Today this figure has dwindled to close to $400 million, as BlackBerry deployed $1.4 billion to acquire the privately held Cylance, which specializes in AI-cybersecurity to help enterprises connect, protect and secure endpoint data. At the time of the acquisition, Cylance reported that its FY 2018 revenues hit $130 million with growth rates of 90%.

Today, a markedly different picture emerges. As of the latest reports from BlackBerry, Cylance's growth rates have now dramatically decelerated and for its full-year guidance, it's pointing towards 25% to 30% year-over-year growth.

Investors are understandably perplexed how it's possible for growth to have decelerated so quickly. Blackberry CEO John Chen addressed that specific question during the earnings call, pointing to a virus which caused a surge in revenues at the time.

BlackBerry's Other Segments

Cylance's revenue in Q1 2020, including any deferred revenues, came in at $51 million, accounting for approximately 20% of BlackBerry's total adjusted non-GAAP revenues. But BlackBerry is not just Cylance.

BlackBerry's largest segment, its Internet Of Things division, has promising growth rates, with midpoint guided revenue growth of 14%. However, its other main contributor, Licensing, which accounted for 29% of BlackBerry's Q1 revenue, is expected to end the year down 5%.

In essence, the market is questioning whether BlackBerry's mobility product suites will be able to integrate and cross-sell into Cylance's PC customer base. For now, investors remain doubtful.

Further complicating issues for BlackBerry, Cylance is not expected to be profitable this year, and is expected to start to be accretive only next year. Investors are thus being asked to be incredibly patient to see if BlackBerry's war chest was deployed in vain or if it was indeed wisely deployed.

In summary, BlackBerry has a mixed bag of holdings which makes it difficult for investors to understand what they are ultimately getting by investing in BlackBerry.

Valuation - Questionable Margin Of Safety

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Superficially, BlackBerry comes across as a terrific bargain, particularly when compared with CrowdStrike (CRWD) - Get Report  or Carbon Black (CBLK) - Get Report . But as famed investor David Einhorn's states, twice a silly price is not twice as silly; it's still just silly. Hence, while there is undeniable positive sentiment towards CrowdStrike and even Carbon Black for that matter, this does automatically imply that BlackBerry carries a margin of safety.

As BlackBerry deepens its integration path, many surprises positive or negative can still surface. And given that BlackBerry is only just guiding its non-GAAP bottom line to be profitable, this highlights how much of a negative bottom-line contributor Cylance is.

Looking back to fiscal 2019, BlackBerry's free cash flow amounted to $50 million. BlackBerry burnt through $49 million of that in its fiscal Q1 2020, after adjusting for a myriad of one-off costs, including its Cylance acquisition and integration expenses, restructuring costs and legal proceedings. This means that investors are not likely to see BlackBerry posting anything above $50 million of free cash flow for some years.

Thus, paying up north of $4 billion market cap puts BlackBerry in a best-case scenario trading at an 80x multiple, which is a frothy multiple when we consider just how many questions are still left unanswered. 

The Bottom Line

Warren Buffett teaches us that turnarounds seldom turn. And this appears to be the case with BlackBerry. BlackBerry deployed its safety net and arguably missed. Whether or not it eventually finds some sort of meaningful traction looks doubtful. But investors are being asked to overpay for what is presently too many questions and too few clear answers.