Canadian software company BlackBerry Limited (BB) leverages artificial intelligence and machine learning to offer data privacy and IoT solutions to enterprises and governments worldwide. BB's shares soared to stratospheric heights earlier this year, fueled by the meme stock mania.

However, closing yesterday’s session at $9.56, the stock is trading 66.8% below its 52-week high of $28.77. Furthermore, the stock has retreated 12.3% in price over the past six months and 6% over the past five days. Also, BB is currently trading below its 50-day and 200-day moving averages of $11.31 and $9.91, respectively, which indicates a downtrend.

Although the company’s strategic moves to expand its cybersecurity portfolio and enhance technological and monitoring solutions could position it for future growth, recent news regarding a flaw in its cybersecurity software could make investors anxious about the stock. Furthermore, BB appears to be struggling to stay afloat financially.

So, here is what we think could influence BB’s performance in the near term:

Software Flaw Could Be Concerning

This month, BB reported that its QNX Real Time Operating System (RTOS) is affected by a BadAlloc vulnerability, which could allow a remote attacker to execute arbitrary code on devices. The flaw could also result in denial-of-service conditions and the crashing of a server. The U.S. Cybersecurity and Infrastructure Security Agency (CISA) issued a warning related to this and stated, “BlackBerry QNX RTOS is used in a wide range of products whose compromise could result in a malicious actor gaining control of highly sensitive systems, increasing risk to the nation’s critical functions.” Although the company stated that it has notified its customers affected by this flaw and has made software patches available to fix the issue, the news regarding the vulnerability in its system could be concerning for investors

Disappointing Financials

BB’s total revenue came in at $174 million for its fiscal first quarter, ended May 31, 2021, representing a 15.5% year-over-year decrease. Its gross margin stood at 65.5% for this quarter, compared to 69.4% in the prior-year period. Also,  the company’s operating loss amounted to $58 million, while its net loss and loss per share came in at $62 million and $0.11, respectively. BB reported an adjusted EBITDA of negative $6 million for this period. Its adjusted operating loss margin stood at negative 13%, compared to negative 1% in the first quarter of 2020.

The company’s 0.3% trailing-12-month asset turnover ratio is 55.7% lower than the 0.7% industry average. Furthermore, the company’s trailing-12-month net income margin is negative 61.6% and its trailing-12-month ROA, ROE, and ROTC are negative 19.5%, 31.5%, and 2.8%, respectively. BB’s 5.9% levered free cash flow margin is 52.2% lower than the 12.4% industry average.

Stretched Valuation

In terms of forward Price/Sales, the stock is currently trading at 16.93x, which is 79.9% higher than the 3.85x industry average. Also, its 281.97 forward EV/EBITDA multiple  is 1,654.5% higher than the 16.07 industry average. And BB’s 67.70 trailing-12-month Price/Cash flow  is 220.8% higher than the 21.09 x.

POWR Ratings Reflect Bleak Prospects

BB has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. BB has a D grade for Quality. This reflects the stock’s negative ROE, ROA, ROTC, and net income margin.

In terms of Value grade, the company has a C, reflective of its premium valuation. Also, it has a D grade for Stability.

Beyond the grades we’ve highlighted, one can check out additional BB ratings for Sentiment, Growth, and Momentum here. Of the 56 stocks in the B-rated Technology – Communication/Networking industry, BB is ranked #52.

Bottom Line

While the Reddit-fueled hype drove BB’s shares to crazy highs earlier this year, the rally fizzled out some time back. In fact, the company’s current valuation is not justified by its poor financial health. Furthermore, recent news related to flaws in its cybersecurity software raises investors’ concerns about the stock. So, we think it is best avoided now.

How Does BlackBerry (BB) Stack Up Against its Peers?

While BB has an overall D (Sell) rating in our proprietary rating system, one might want to consider taking a look at its industry peers Viavi Solutions Inc. (VIAV) and Extreme Networks, Inc. (EXTR), which have an A (Strong Buy) rating.

BB shares rose $0.07 (+0.73%) in premarket trading Friday. Year-to-date, BB has gained 45.10%, versus a 18.36% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

More...