Waterloo, Canada-based BlackBerry Limited (BB) is set to unveil its quarterly earnings results on Thursday, September 28, after the market closes. Analysts expect BB’s revenue and EPS for the fiscal second quarter (ended August 2023) to decline 12.5% and 1.8% year-over-year to $146.95 million and negative $0.05, respectively.

For the same quarter, the company projects its overall revenue to reach approximately $132 million, with IoT revenue of about $49 million and Licensing and Other revenue to reach nearly $3 million. Cybersecurity segment revenue is predicted to fall below expectations, with anticipated earnings of merely $80 million, attributed to the failure to materialize government deals during the quarter.

Investors lauded the significant uptick, with the company surpassing top and bottom-line estimates in the last reported quarter ended May 31, 2023. However, upon closer inspection, the increase in revenue can be directly linked to the substantial growth in Licensing and Other revenue to $235 million, principally attributed to proceeds from patent sales.

Since BB went public in 1997, it quickly earned a reputation for its omnipresent smartphone business. In a strategic shift, however, BB shuttered its flagship operations last year and has since concentrated on offloading the remaining patents from its mobile device era.

Revenues from its cybersecurity and IoT businesses saw a year-over-year contraction to $93 million and $45 million, respectively, for the quarter ended May 31, 2023.

A glance at BB's trajectory over the past three and five years highlights a marked downturn, with revenues dwindling at CAGRs of 4.8% and 1.1%, respectively. Its tangible book value saw a steeper decline, at CAGRs of 28.2% and 44.6% over the same periods.

Moreover, increasing competition casts further uncertainty on BB’s immediate future. Over the past decade, the company has transitioned distinctly from its roots as a smartphone innovator to positioning itself as a cybersecurity and Internet of Things (IoT) software solutions provider. BB competes with established and formidable industrial leaders even with significant inroads into these burgeoning markets.

Furthermore, institutional investors and hedge funds have recently changed their BB stock holdings. Institutions hold roughly 44.7% of BB shares. Of the 260 institutional holders, 94 have decreased their positions in the stock. Moreover, 31 institutions have sold out their positions in the stock with 2,078,592 shares, indicating bearish sentiments.

Over the past year, the stock has declined 1.6% to close the last trading session at $4.99. Over the past month, the stock plunged 4.6%.

Here are the factors that could affect BB’s performance in the near term:

Weak Financials

For the fiscal first quarter that ended May 31, 2023, BB’s revenue stood at $373 million, while its adjusted gross margin stood at $180 million. BB registered an operating loss of $11 million during the quarter. In addition, the company’s adjusted net income and adjusted EPS came in at $35 million and $0.06, respectively.

Moreover, cash, cash equivalents, restricted cash, and restricted cash equivalents declined 8.1% year-over-year to $385 million. As of May 31, 2023, BB’s current assets stood at $696 million, compared to $743 as of February 28, 2023. Furthermore, as of May 31, 2023, its current liabilities came at $736 million, compared to $729 as of February 28, 2023.

Stretched Valuation

In terms of its forward non-GAAP P/E, BB is trading at 998.07x, significantly higher than the industry average of 22.09x. Its EV/EBIT multiple of 183.98 is 936.5% higher than the industry average of 17.75x. The stock’s forward Price/Sales multiple of 3.46 is 33.9% higher than the industry average of 2.58.

Poor Profitability

BB’s trailing-12-month EBIT and net income margin are negative at 17.19% and 65.51%, compared to the industry averages of 4.51% and 2.03%, respectively. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.42x is 32.5% lower than the industry average of 0.62x.

Disappointing Analyst Estimates

For the fiscal third quarter ending November 2023, BB’s EPS is expected to come at a negative $0.01, whereas its revenue is expected to come at $187.68 million. Moreover, Street expects the company’s EPS to come in at $0.01 for the fiscal year ending February 2024, and revenue is expected to reach $867.57 million.

POWR Ratings Reflect a Somber Outlook

BB’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different 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 Stability grade of D, in sync with its five-year beta of 1.16.

The stock also has a D grade for Quality, consistent with its poor profitability. It has a D grade for Sentiment, in sync with the unfavorable bottom-line estimates.

It is ranked #42 within the D-rated 49-stock Technology - Communication/Networking industry.

Beyond what we have mentioned above, to see the other ratings of BB (Growth, Value, and Momentum), click here.

Bottom Line

The challenging macroeconomic landscape, combined with BB’s unstable financial performance, deteriorating revenues, and unpropitious projections, is exerting substantial pressure on the stock. The current scenario, therefore, advises caution, suggesting that investors might want to steer clear of this stock.

How Does BlackBerry Limited (BB) Stack Up Against Its Peers?

While BB has an overall grade of D, equating to a Sell rating, you may check out these other stocks within the Technology - Communication/Networking industry with an A (Strong Buy) rating: PCTEL, Inc. (PCTI), Eutelsat Communications S.A. (ETCMY), and Cisco Systems, Inc. (CSCO). For exploring more A and B-rated Technology - Communication/Networking stocks, click here.

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BB shares rose $0.01 (+0.20%) in premarket trading Tuesday. Year-to-date, BB has gained 53.07%, versus a 14.28% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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