Is BlackBerry a Buy?

BlackBerry (BB -1.43%) lost nearly 90% of its market value over the past decade as iPhones and Android devices gutted its core smartphone business. Its global market share plunged from about 20% in the beginning of 2009 to nearly 0% at the end of 2016.

But something remarkable happened. CEO John Chen, who took the helm in late 2013 after BlackBerry failed to sell itself, salvaged the company by halting the production of first-party smartphones, expanding its portfolio of higher-margin software services, and leveraging its patent portfolio to generate higher licensing fees.

Image source: Getty Images.

The turnaround was painfully slow, but it finally paid off last quarter as BlackBerry reported its first quarter of positive sales growth in years. Should investors buy shares of BlackBerry after it reached that inflection point?

How BlackBerry made a comeback

In 2016, BlackBerry stopped producing its own smartphones and licensed its brand to the Chinese company TCL. That move -- which mirrored Nokia's (NOK 2.03%) decision to license its smartphone brand to FIH Mobile -- kept the BlackBerry brand alive and generated higher-margin licensing revenues for BlackBerry's "licensing, IP, and other" business.

BlackBerry then focused on upgrading its core software services, which include enterprise mobility services, cybersecurity software, the QNX embedded OS for vehicles, and the IoT (Internet of Things) platform BlackBerry Spark. It also acquired several security companies to expand that ecosystem, including Good Technology, Encription, and Cylance, then sued a long list of companies to boost its licensing and IP revenue.

BlackBerry's revenue repeatedly declined as it dumped its hardware business and evolved into an enterprise software company, but the transition paid off as its sales growth turned positive again:

YOY = Year-over-year. *Non-GAAP. Source: BlackBerry quarterly results.

Moreover, the elimination of its hardware business and its focus on higher-margin software and services revenues boosted its gross and operating margins:

Non-GAAP. Source: BlackBerry quarterly reports.

Those improvements enabled BlackBerry to generate a non-GAAP net profit of $51 million in the fourth quarter, compared to a loss of $10 million a year earlier. It also reported a GAAP profit of $18 million.

Image source: Getty Images.

Can BlackBerry maintain that momentum?

BlackBerry expects its revenue to rise 25% at the midpoint in fiscal 2020, and for the gross and operating margins at its core business (excluding Cylance) to remain stable. However, it also expects to book almost $300 million in extra costs from its integration of Cylance.

As a result, analysts expect its non-GAAP EPS to decline 63% to $0.09 per share this year. But looking further ahead, they expect its EPS to more than double to $0.21 per share in fiscal 2021. Based on that forecast, BlackBerry trades at about 40 times forward earnings, which is reasonable relative to its earnings growth rate.

Some BlackBerry bears claim that it relies too heavily on its "licensing, IP, and other" segment, which posted 71% year-over-year sales growth last quarter and accounted for 39% of its top line. BlackBerry's takeover of Cylance, which contributed heavily to that growth, and its "patent troll" lawsuits against Facebook (META -4.13%), Snap (SNAP -4.04%), Nokia, and even Ryan Seacrest seem to support that thesis.

But during last quarter's conference call, BlackBerry stated that its licensing revenue should decline 5% in fiscal 2020 as its full-year revenue rises 25%. Most of that growth should come from Cylance's core business, which is expected to post 25%-30% sales growth for the year.

Should you buy BlackBerry today?

BlackBerry isn't the ideal stock for conservative investors. However, investors looking for a promising turnaround play that just hit a turning point should keep a close eye on this stock. If BlackBerry hits its growth targets, it could quickly attract the attention of investors and potential buyers again.