BlackBerry Ltd shares got several price target upgrades after the arbitration award. The question is how will BlackBerry Ltd use its war chest?
Shares of Ontario-based software company BlackBerry Ltd (NASDAQ:BBRY) jumped more than 16% in yesterday's trade, creating a new 52-week high after the company announced that it has won a windfall of $814.9 million in an interim arbitration award against Qualcomm (NASDAQ:QCOM). Moreover, the arbitration award is not appealable by Qualcomm. The final award which will include interest rates and legal fees will be decided on May 31st. The windfall gain has earned BBRY stock price target upgrades from several analysts. The arbitration relates to an overpayment of royalty by BlackBerry Ltd between 2010 and 2015. The question now is, does this one-time award change anything for BlackBerry Ltd stock?Balance sheet risk will reduce for BlackBerry Ltd.
Some are arguing that since this is a one-time windfall gain which has nothing to do with operations, not much has changed for BlackBerry Ltd. While it is true that it's a one-time gain, it does have a material impact on BlackBerry Ltd financials and the risks around the stock. The award of $814.9 million is a huge windfall for the Canadian software company which is in the middle of a turnaround. For comparison, analysts estimate BlackBerry Ltd to report revenue of $988.73 million.
Of course, the arbitration award is not likely to impact this year's revenues and profits. BlackBerry is likely to restate it previous years financials to incorporate these changes. However, it will impact BlackBerry's balance sheet. BlackBerry's cash balance which stood at $1.2 billion will shoot up above $2 billion, while net cash position (after deducting $590 million of long-term debt) will reach $1.5 billion. The award raises the cash per share to $3.23 from $1.85. This will reduce the risk associated with BlackBerry and provide more time to CEO John Chen and his management team. Given the past losses, BlackBerry is likely to reduce the tax bill on this gain substantially.
So the question now is, how will BlackBerry use its war chest? While generally companies use any windfall to pay down their debt, that option might not be available for BlackBerry Ltd even though the company has around $600 million in long-term debt. BlackBerry Ltd had recently restructured its debt by redeeming $1.25 billion of 6% debentures and partly replacing it with $600 million of 3.75% debentures. The 3.75% debentures are not redeemable at the option of the company prior to maturity date, according to its annual report. There are several other possible ways in which BlackBerry Ltd can use the windfall, including special dividends and share buybacks, apart from investing in its own business as Chen had suggested in January. Then there's also the possibility of an acquisition.Is BlackBerry Ltd gearing up for another acquisition?
Many analysts are betting on the possibility of BlackBerry Ltd going for an acquisition to spur its revenue growth. "We believe any acquisitions to build out BlackBerry’s IoT sales channel would be attractive," analyst Daniel Chan of TD Securities wrote in a note. John Chen and BlackBerry are no strangers to acquisitions. BlackBerry bought five companies between September 2014 and February 2016, including Good Technology for $425 million. Even the QNX software, which is currently one of the biggest growth drivers for BlackBerry Ltd was acquired by BlackBerry from Harman in 2010. According to research, apart from an increase in investment activity, a company also becomes more open to an acquisition after a windfall gain. However, the research also warns that in general, these acquisitions are value destroying.
Canaccord Genuity technology analyst Michael Walkley, who raised his price target on BlackBerry stock from $8 to $9.5 wrote in a note that "With BlackBerry planning to invest for growth in its software businesses, the surprising arbitration award and $815 million in cash from Qualcomm will bolster BlackBerry’s balance sheet and increase the likelihood of acquisitions to augment growth,".BlackBerry Ltd stock gets price target upgrades from analysts.
The windfall gains earned BlackBerry Ltd (NASDAQ:BBRY) stock upgrades from several analysts including Goldman Sachs and RBC capital. Analysts at RBC Capital and Canaccord Genuity raised their price target on BBRY stock from $8 to $9.5 to account for the windfall gains. However, most analysts agree that this will not change much on the operations front and BlackBerry will still have most of the challenges to deal with, though, it will give the management time and fire power to execute the turnaround. BlackBerry's recent earnings have increased the chance of a turnaround with software and services segment driving the growth. However, as we said in our previous post, the turnaround is still a few quarters away.
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