Blackberry/TheStreet

BlackBerry (BB - Get Report)  is a household name from a different era. Presently, BB is a stock that shareholders like to make strong proclamations about of hidden underlying value. Meanwhile, the remainder of the market struggles to find a compelling enough reason to get involved with the name. With too many yellow flags, as well as what is arguably a reasonably priced stock, overall shareholders are being offered a poor risk-reward. Here's why:

BlackBerry's Narrative Is Always Alluring

BlackBerry released its Q2 2020 earnings last Tuesday and the stock fell more than 15%. 

BlackBerry's management team continues to praise the company's pivot towards cybersecurity. In fact, as has been widely reported, BlackBerry had flexed its solid balance sheet with ample cash to acquire Cylance for $1.4 billion (this business has now been renamed BlackBerry Cylance). BlackBerry's mission is to be viewed as the go-to cybersecurity platform.

However, the most puzzling aspect of the story is that BlackBerry's CEO John Chen declared that Cylance will continue to deliver 25% to 30% growth rates over the coming two quarters. However, even if we use Cylance's non-GAAP revenue from fiscal Q1 2020 which reached $51 million, while fiscal Q2 2020 was flat at $51 million, how does this segment all of a sudden start to post at least 25% growth rates going forward?

Moving on, where BlackBerry is absolutely correct is that cybersecurity is a rapidly growing sector, with huge promise. So much so, that BlackBerry's peers, such as Carbon Black (CBLK)  , which is in the process of being acquired, and CrowdStrike (CRWD) , are being very expensively valued. 

But how does BlackBerry ensure that it gets its fair share? That's easy to speculate on, but in reality, the numbers simply don't appear to live up to that expectation.

Digging Further Into The Quarter

Using the headline figures, BlackBerry's results don't appear all that bad -- after all, its non-GAAP revenue was up 22% year-over-year.

However, once we back out the newly acquired Cylance's revenue stream, BlackBerry's remainder portfolio for Q2 2020 would have actually been marginally down year-over-year. This should make investors pause for thought.

Assuming that BlackBerry's core portfolio excluding Cylance continues this unimpressive growth trajectory, how will the next twelve months look for BlackBerry? Will it still succeed in posting close to $1 billion of revenues? This looks highly unlikely.

The Multiple Drives the Return

Investing in a software company essentially boils down to investor sentiment. How investors will think about BlackBerry in the coming twelve to eighteen months' time is paramount. If BlackBerry were to signal to the market that it was not only here to stay, but a growing enterprise, investors would be willing to rapidly re-rate its stock.

The problem though that over the past five years, shareholders have not made any money on this stock. What's more, during the past two years, in particular, the competition has intensified. Accordingly, during that recent earnings call, according to Chen, Microsoft (MSFT - Get Report) has taken a more aggressive stance, which has not helped BlackBerry's position.

This has forced BlackBerry to slightly reduce its top-line guidance by 2%, and BlackBerry is now guiding to 23%-25% year-over-year growth.

Also, in the past six months, BlackBerry's cash flows from operations have turned to negative $47 million down from positive $22 million during the same period a year ago -- which doesn't paint an inspiring picture. 

The Bottom Line

Investors considering whether Blackberry is a worthwhile investment are inevitably going to look up its share price from the past twelve months and postulate whether today's price indicates it's being undervalued.

However, despite having fallen from grace and trading at a 50% discount to a year ago, I contend that investors getting involved with BlackBerry at close to a $3 billion market cap are still overpaying.

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