Don't Get Fooled by BlackBerry's Temporary Performance
- By Harsh Jain
BlackBerry's (BBRY) shares tumbled more than 35% over the past two years, but the stock has surprised shareholders this year. It was off to a great start heading into 2017, reaching its two-year high. After reaching its two-year high, however, the stock's downturn started once again. But is still up nearly 45% year to date, representing a good exit point.
Warning! GuruFocus has detected 3 Warning Signs with BBRY. Click here to check it out.
The intrinsic value of BBRY
A decade ago, BlackBerry was the undisputed leader of the worldwide smartphone market. The company's high-quality physical keyboards fascinated a huge amount of users, who wanted to use its devices for secure text messaging and basic web browsing.
Everything was going in the right direction for BlackBerry until Apple (AAPL) released its first iPhone model in mid-2007. Moreover, another popular smartphone, OS "Android," came into existence in 2008. Both iPhone and Android phones showed up with their gleaming touch screens and substantial app stores.
As a result, BlackBerry's smartphone market share collapsed as it never managed to find a strong foothold in the new market. Finally, the company was forced to shut down its in-house phone manufacturing business last year after 14 years of making handsets. Instead, the company is counting on third-party partners for any future device.
According to a report from BusinessInsider.com, BlackBerry's worldwide smartphone OS market share has officially reached 0%, down from more than 20% in the first quarter of 2009. Although BlackBerry also launched several smartphones running on the Android platform, its numbers are still meager.
BlackBerry has been relying on its software and services business to reverse its fortunes over the past several years. The company's QNX embedded operating system is the second largest component of its software sales, after its enterprise mobility management business. Although its QNX platform currently holds leading position in the automotive infotainment systems space, it could face significant risks going forward.
Moving ahead, the company expects its QNX platform to power more than 60 million automotive systems around the globe. Not only had this, but the company is likely to deliver nearly 36 million ONX licenses this year, with licensing fees in the range of $3-$5 per unit. However, BlackBerry's QNX business could face fierce competition from growing presence of Automotive Grade Linux (AGL) in the forthcoming years.
Recently, Toyota publicized that the upcoming model of its infotainment systems will be built on AGL platform, not BlackBerry's QNX. AGL-based infotainment systems will be available on Toyota's vehicles beginning in late summer 2017. Apart from this, AGL will also provide a better scope for third-party applications.
With time, many more automakers will likely use AGL because it is an open source project which allows code reusability along with a more efficient development process. Ultimately, this decreases development costs as well as time-to-market for new products. Moreover, it also minimizes the fragmentation across the industry.
Apart from this, several auto manufacturers, such as Ford (NYSE:F), are building their interfaces on top of Windows Embedded Automotive operating system. Also, well-established tech giant's Apple (AAPL) and Google (GOOGL) are likely to shake up automotive infotainment space. Recently, Google introduced its Android Automotive infotainment system, and Apple is on its way developing a new operating system for its self-driving car software to run on.
Both Apple and Google have a massive amount of free cash flow which will allow them to spend profligately on R&D. This could hurt BlackBerry's QNX business in the future as the market evolves.
Summing up
Although BlackBerry has performed unexpectedly well this year, there is no solid reason behind its dynamic performance this year. The company's unbelievable performance this year is driven by bullish enthusiasm for its exit from self-produced smartphones as well as the expansion of its software ecosystem. Unfortunately, the shift in strategy still has not stopped its double digit revenue drops.
Currently, most of the infotainment systems are being built on BlackBerry's QNX operating system, but the situation will likely change with the growing presence of AGL in the coming years.
On the other hand, the stock currently trades at a price-earnings ratio of 41.5, comparatively greater than the industry's average, suggesting it is overvalued. However, BlackBerry's shares are up 45% year to date, and shareholders should consider booking profit as its future looks bleak.
Disclosure: No position in the stocks mentioned in this article.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with BBRY. Click here to check it out.
The intrinsic value of BBRY
