Please ensure Javascript is enabled for purposes of website accessibility

Blackboard Blasts Off

By Rich Smith - Updated Apr 6, 2017 at 2:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This company is more profitable than meets the eye.

Correct me if I'm wrong. Recessions are supposed to be bad for business, right?

"You're wrong."
So said Blackboard (NASDAQ:BBBB) Thursday, in effect, when in the middle of one of the worst recessions in recent memory, the educational-software provider and Google (NASDAQ:GOOG) partner closed out its year with a report of accelerating sales growth. Overall sales for the year had already risen by 30%, but in Q4, Blackboard revved up to a 35% growth pace.

Profits told a different story, of course. Blackboard earned only $0.09 last year, down 36% from 2007. But that's because Blackboard is a software company. So just like Microsoft (NASDAQ:MSFT) or Oracle (NASDAQ:ORCL), its income statements generally lead off with high gross margins that then get whittled down by operating costs.

In Blackboard's case, the big hit comes from GAAP accounting rules that require it to amortize the cost of its serial acquisitions from years past. And as we've seen following big acquisitions at Symantec (NASDAQ:SYMC) and Natus Medical (NASDAQ:BABY), the cost of amortizing acquisitions can suck up essentially all of a company's net income. Blackboard, as a result, is left with little-to-no "accounting profit."

Dig deeper
But shift your gaze to the cash flow statement, and you'll see that far from earning nearly nothing, Blackboard generated $55.8 million in cash profits last year. Blackboard's hogtied GAAP numbers may have the stock trading at a triple-digit price-to-earnings ratio, but the stock sells for only 16 times its trailing free cash flow. Considering that analysts expect Blackboard to keep growing its profits at 25% per year over the long term, that tells me the stock is attractively priced today -- but how long will it take for investors to realize just how cheap Blackboard really is?

Not long now
According to management's guidance, amortization of old acquisition costs this year will be about 25% less than last year. That's going to do wonders for Blackboard's GAAP numbers, by removing the pressure on net profits. With lower costs, GAAP profits could rise as much as eightfold next year, to perhaps $0.72 per share.

Foolish takeaway
Assuming that this comes to pass, Blackboard is trading at about 40 times forward profits today -- a valuation that still looks pricey from a traditional PEG point of view. But with free cash flow still on the rise (Blackboard is guiding to a midpoint of $65 million), the stock actually looks cheap to me. My advice: Bide your time, wait for investors to misinterpret the numbers, and pick up the stock on any pullbacks from Thursday's bull run.

Does the Motley Fool Hidden Gems team agree? They're the ones who recommended the stock in the first place, after all. Find out whether they still consider this one the teacher's pet when you take a free trial.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Blackboard Inc. Stock Quote
Blackboard Inc.
Microsoft Corporation Stock Quote
Microsoft Corporation
$262.85 (1.26%) $3.27
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,265.26 (4.16%) $90.51
NortonLifeLock Inc. Stock Quote
NortonLifeLock Inc.
$22.13 (-0.67%) $0.15
Oracle Corporation Stock Quote
Oracle Corporation
$71.99 (1.58%) $1.12
Natus Medical Incorporated Stock Quote
Natus Medical Incorporated
$32.82 (0.37%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.