BlackBerry (TSX:BB)(NYSE:BB) isn’t exactly a business that’s easy to understand. The smartphone-maker turned enterprise software developer continues to undergo its transformation under renowned turnaround artist John Chen.
With legendary investor Prem Watsa maintaining his conviction in the company, BlackBerry looks like a play that’s destined to have a massive payoff. Given the massive bumps in the road, however, the stock is not for the faint of heart or those who don’t see themselves holding shares for at least five years.
A ridiculously long time horizon required
BlackBerry stock has been stuck in limbo ever since the stock bottomed out in late 2012 after being squeezed out of the hardware business. Given that shares are once again trading at multi-year lows, it appears that John Chen has failed to turn BlackBerry into a force to be reckoned within the cutthroat enterprise software industry after spending almost six years at the helm.
While Chen does have an impressive track record of turning firms around, investors have grown impatient with the seemingly endless setbacks that have plagued the company under Chen’s tenure.
More recently, shares plunged 22% (which extended to 30% in the days that followed) after the company released some pretty underwhelming second-quarter numbers driven lower by weakness in BlackBerry’s enterprise software solutions (ESS) segment.
As the company continues its move deeper into enterprise software, the last thing investors wanted to see are competitive pressures weighing down results from BlackBerry’s bread-and-butter business.
There’s no question that the business of enterprise software is ridiculously competitive. Although management denied competition was a cause for concern, investors seemed to take their commentary with a grain of salt.
That’s understandable, as BlackBerry has been a perennial underperformer for a considerable amount of time, with most investors having zilch to show for their patience in the name. At this juncture, investors want to see sustained improvements rather than potentially overly optimistic executive commentary.
BlackBerry has a sizeable uncertainty discount
What investors need to understand is that there are still a tonne of moving parts, and near-term financial results may not paint a clear enough picture of BlackBerry’s longer-term trajectory.
The company has pulled the trigger on many acquisitions, capital continues to flow toward higher-margin businesses, and there’s still much work to do before BlackBerry can come roaring back.
While six years is a long time to wait around in a stock that hasn’t done much, it could take another six before the real rewards can be taken in by investors.
There’s a lack of visibility, tremendous uncertainty, and difficult-to-understand businesses under the BlackBerry umbrella, which makes the stock tough to own for those who lack conviction.
What BlackBerry does have, however, are top-tier assets like QNX and recently-acquired cybersecurity firm Cylance and a terrific CEO in John Chen who has what it takes to get BlackBerry back on the right track.
Sure, BlackBerry may be painful to hold, but at current valuations, the name could prove to be a big steal in a few years out. The stock trades at around 1.1 times book value, which is absurdly cheap given the calibre of assets you’re getting.
Nobody knows when BlackBerry will rocket higher, but it could happen abruptly after a better-than-expected quarter. So, if you’re looking for a wonderful business at a wonderful price, now is the time to act because I have a feeling that the price of admission could go way up once we see sustained improvement from the firm that’s still in the midst of a transformation.
Stay hungry. Stay Foolish.
