BB is probably not the next GME, it’s probably the next TSLA

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by JordanLeDoux

NOTE: By “next TSLA” I mean a stock that grows far beyond what talking heads think is “reasonable”. Not that they are company like TSLA or that they will see similar returns.

EDIT: BECAUSE SOME PEOPLE CAN’T READ, BB IS NOT GOING TO BECOME A NEARLY TRILLION DOLLAR COMPANY LIKE TESLA. The comparison is with a company that is undervalued because it’s going to get in on a brand new market that it helps create.


BB has some elevated short interest for sure. That short interest may even be increasing. However the float on the stock is massive compared to GME. There are over 550 million available shares of BB, and the short interest is below 100%. While there may be some movement up based on shorts covering, GME is a once in a lifetime thing.

Nothing is the next GME. Not AMC, not NOK, not BB. The large players aren’t ever going to be caught this way again in a place where retail investors can screw them, and GME isn’t over. If what you want it to participate in that, then you should buy GME.

But I think BB is fundamentally more valuable than its current price.

Current Situation of the Company

BlackBerry, which started as Research In Motion, was the “original” smartphone company, before Apple ate them alive. They didn’t have the product pipelines or the money to compete against Apple, and the company was nearly killed by the iPhone and later the Samsung Galaxy brand.

Over the last several years, BlackBerry has pivoted into a software security company. They mainly sell security products with a focus on machine learning and artificial intelligence.

From Fidelity:

BlackBerry Limited provides intelligent security software and services to enterprises and governments worldwide. The company leverages artificial intelligence and machine learning to deliver solutions in the areas of cybersecurity; safety and data privacy; and endpoint security management, encryption, and embedded systems.

Over the last year, BB has re-positioned itself to take advantage of the nascent market of autonomous and intelligent vehicles. (Source: AWS and BlackBerry QNX join forces to accelerate auto innovation with BlackBerry IVY, a new intelligent vehicle data platform)

BlackBerry IVY is a scalable, cloud-connected software platform that allows automakers to provide a consistent and secure way to read vehicle sensor data, normalize it, and create actionable insights from that data both locally in the vehicle and in the cloud. Automakers can use this information to create responsive in-vehicle services that enhance driver and passenger experiences as well as provide valuable product insights back to the manufacturer.

They also have a partnership with Baidu for that company’s Apollo autonomous driving open platform. (Source: BlackBerry Expands Partnership with Baidu to Power Next Generation Autonomous Driving Technology)

BlackBerry Limited (NYSE: BB; TSX: BB) today announced an expansion of its strategic partnership with Baidu, whose high-definition maps will run on the QNX® Neutrino® Real-time Operating System (RTOS) and will be mass-produced in the forthcoming GAC New Energy Aion models from the EV arm of GAC Group (Guangzhou Automobile Group Co., Ltd.).

The QNX Neutrino RTOS foundation for Baidu’s high-definition maps is a robust real-time microkernel operating system that provides deterministic performance as well as flexibility to address the limited resources of the embedded system.

Their QNX system is already used in over 100 million cars that are currently on the road, including a direct partnership with Ford that they’ve had since 2016.

They are in the final stages of completing an amazing turnaround as a company, and it looks like they have a good chance of doing it successfully. So what are the challenges?

Balance Sheet Issues

BB has almost 2/3 of their current “assets” tied up in patents. This can be seen on their 2019 balance sheet as “Intangible Assets – Total: $2.352 billion”. Their assets which are easier to liquidate are nearly exactly their current liabilities ($1.196 billion vs. $1.121 billion), as they added $638 million in debt in FY2019.

Just a few weeks ago, BlackBerry sold 90 of its smartphone patents to Huawei. It also signed a licensing deal with OnwardMobility and Foxconn to allow it’s name and software to be used in making a new 5G Android-powered smartphone that has a physical keyboard, filling a small but important niche in the smartphone industry that is mostly untapped at this point.

These moves signal the intent of BlackBerry to leverage parts of its balance sheet that have been mostly sitting idle since 2016 when they exited the smartphone market for good as a manufacturer.

The challenge is that their cash flow and income have been negative or paltry for quite a while. That was never going to turn around until they were able to monetize some of their existing IP and position the company for a solid market segment. At this point, they have successfully done both.

Earnings

This section definitely depends on your focus and perspective. For instance, BlackBerry’s GAAP EPS has been negative more than positive since 2016. But on the other hand, their adjusted actual EPS has beaten consensus estimates for every single quarter going back to Q3 2015.

If you believe in Chen’s ability to execute the turnaround, then this seems positive. If you think the company is destined for failure and a slow death, then this seems negative.

Conclusions

Overall, I think BB is undervalued at its current price. They are very well positioned to take off as autonomous vehicles become more common, and most importantly, they have extremely valuable partnerships in many different markets, including some fantastic access to the Chinese market through their partnership with Baidu.

Autonomous vehicles are a market that doesn’t exist yet. Not truly. But many people believe that autonomous vehicles are going to turn into a HUGE segment of the market over the next decade. While car companies (particularly TSLA) provide direct exposure to that, they come with manufacturing risks and other things such as supply-chain risks. TSLA, Toyota, Ford… they could all face issues that simply come down to “we ran out of good suppliers of Cadmium” or something similar, while what you want is exposure to autonomous vehicles.

BB has none of that. Their revenue and exposure to the market is entirely within the software, and because of their wide range of partnerships they shouldn’t be dependent on any particular manufacturer. I expect to see them reporting positive earnings during FY2021 (though only slightly), and a much more obviously robust performance in FY2022.

Their patent portfolio alone in 2020 was worth about what their market cap was, that’s how undervalued this company was due to concern about earnings. Once those earnings turn around, I think the valuation based on only fundamentals should put the stock at about $20 right now, and about $30-$35 by the end of this year.

There is also a non-trivial chance of a purchase by another company such as Alphabet that wants access to their partnerships, patent portfolio, and machine learning software.


DISCLAIMER: I am not a financial advisor and this is not financial advice. It is an organization of my own thinking behind the positions I have opened with my money.


Overall, BB benefits from its meme-stock status, and a bit of a short squeeze could happen for sure. But based just on my reading of their business itself, I think the stock has room to as much as triple within a year.

Current position disclosure:

100 BB @ 14.2687
+4 19 FEB 21 15c @ 4.125
+2 19 FEB 21 40c @ 1.93
+1 19 MAR 21 25c @ 4.64

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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