Is BlackBerry Stock Headed For A Correction?

While BlackBerry Ltd had a good quarter by its usual standards, it is still a few quarters away from a turnaround. s BlackBerry Stock Headed For A Correction

The Canadian software company BlackBerry Ltd (NASDAQ:BBRY) recently came out with its FY 2017 and Q4 2017 earnings report. In FY 2017, BlackBerry's revenues declined by 40% while losses jumped by 570% YoY. However, BBRY stock rallied by more than 10% on the earnings release because the numbers were better than expected. But more than the beat it was the expectation of a turnaround which was the main driver behind the stock rally.

For almost 3 years now BlackBerry Ltd is trying to turn around its business, which is much longer than BlackBerry management had initially promised. In this three-year period, BlackBerry's revenues have fallen from $3.34 billion to $1.3 billion, a decline of 60%. BBRY stock is down 12% in the same period. But with the recent earnings report, there is rising optimism around BlackBerry stock. The recent earnings beat also earned a rating upgrade for BlackBerry stock.

Growing optimism around Blackberry Ltd stock.

The growing optimism is due to the strong performance of Software and Services segment. In the latest quarter, the Software and Services revenue came in at $182 million ($193 million if you include deferred revenue) higher than what analysts were expecting. The good part about BlackBerry's software revenue is that 80% of it, is of recurring nature which will act as a tailwind going forward. While the growth in software segment will decelerate, it is still expected to remain better than industry. John Chen expects the software revenues to grow by 13%-15% next year. Blackberry is also aiming for a positive free cash flow and profitability on non-GAAP basis next year. For future growth, BlackBerry is betting heavily on the connected car market.

The connected car market (including hardware and applications) is expected to grow at a CAGR of 35.54% from 5.1 million units in 2015 to 37.7 million units by 2022. And of all the segments of the connected car market, telematics application which includes fleet management and infotainment solutions are expected to grow at the fastest pace. Blackberry is hoping to corner a big chunk of this market with its Radar and QNX software. The QNX software is the key ingredient in the infotainment systems of many automakers. More than 60 million cars use BlackBerry infotainment solutions, which is 50% of the market.

BlackBerry stock is currently overvalued.

While BlackBerry Ltd had a good quarter by its usual standards, it is still a few quarters away from a turnaround. BlackBerry's revenues are expected to decline by 28% next year before plateauing in FY 2019. Also, while software revenues will grow, Service Acess Fees (SAF) revenues will continue to decline and eventually reach zero. This will have an outside impact on Blackberry's bottom line. SAF is the most profitable of all BlackBerry's segments. While SAF contributed 16.5% of BlackBerry's revenues, it made up more than 1/3rd of its operating profit. And then, there is valuation. With 2018 expected revenue of $988 million and the current market cap of $4.28 billion, BBRY stock is trading at 3.4x its forward revenue. This is a pretty high valuation for a loss making company with declining revenues.

Technical analysis indicates correction ahead for BlackBerry stock.

BBRY Technical chart

Source: BlackBerry Ltd technical charts by

While valuations show that BBRY stock is overvalued, the technical analysis indicates BlackBerry stock might be headed for near time correction. At least two technical indicators, Relative Strength Index (RSI) and Bollinger Bands are flashing warning signs. Bollinger Bands are volatility bands placed two standard deviations above and below the 20-day moving average line. These bands capture approximately 90% of stock price movement. When the stock price hits the upper Bollinger band it is a sell signal, conversely, when the stock price breaches the lower Bollinger band it's a buy signal. With the recent rally, BBRY stock has breached the upper Bollinger band which is a bearish signal. As you can see in the technical chart, BlackBerry stock has alway corrected after testing the upper Bollinger band. The bearish signal from Bollinger band is complimented by another bearish signal from RSI. RSI is currently above 70 indicating that BBRY stock is overbought.

The recent earnings report indicate improving prospects for Blackberry Ltd. QNX platform and Radar devices have good growth opportunities. However, in spite of the progress, BlackBerry still remains a risky investment. The revenues will continue to decline next year and the stock is overvalued. Investors should avoid the stock for now. If you are looking to invest in tech stocks have a look at our Top Stock Picks from the technology sector which have outperformed NASDAQ by almost 135%.