I’m an ex-finance guy and an ex-internal auditor so looking at both the financial results of Blackberry and their falling valuation, I couldn’t help but wonder how many folks were overreacting to the wrong thing. You see when you have a situation where revenue drops but profit increases it often means the company has shifted from revenue sources with low profit margins like hardware to revenue sources from high margin sources like software making the firm far healthier. This is why it is important to look more closely at bottom line performance and trends than top line performance and trends and it also speaks to why an increasing number of firms that are undergoing change are envying Dell’s move to become a private company and walk away from public investors who often drive really bad executive behavior in firms.
Let’s look at BlackBerry against the trend to go private this week.
What triggered this post was another post in Seeking Alpha on this same subject, I won’t repeat the trouble that author went though discussing trends but his conclusion is to point. Regardless of what the market did with the news, a near polar flip between loss and profit has BlackBerry in a far better place than they were in prior unprofitable quarters. Simply said, a firm that is losing money is on life support and has a fixed termination date when the money will run out regardless of how much money they have. A firm that is generating cash quarter over quarter, isn’t terminal and you don’t have to worry, as long as they remain in the black, about them going under. When a firm goes under its stock is largely worthless as the primary debtors tend to consume most of the cash leaving little for the stockholders, that doesn’t happen as long is the firm is making money.
To me, that means that a firm making money should always be worth more than a firm losing it—particularly if the firm losing money has no path to profit. Take for instance the DotCom companies and a number of the more recent social networking firms that not only weren’t profitable but had no real path to profitability. To me those are straight gambles but they often sustain an impressive market value until they eventually collapse leaving a lot of investors in the dust. For some screwy reason that risk rarely is fully translated to stock price and this lack of investment sense trends to favor blue sky firms with little foundation over those with more sustainable business plans.
It is this kind of thing that tends to drive CEOs nuts, if it isn’t activist investors forcing them to do strategically suicidal things like burning off cash reserves, selling off properties, and breaking up companies in order to spike stock price, it is regular investors who seem to value top line growth over bottom line performance even though it is generally easy to buy revenue and by doing so put the firm out of business.
This is why there has been such a focus on Michael Dell’s efforts to go private because—even though it was a painful process—the end result is now the largest tech company in the world (which wouldn’t have existed had Dell not first gone private) and impressive revenue and profit growth. Michael discovered that if you are able to distance yourself from influencers who are clueless—or worse, want to destroy the company in order to make a short term but unsustainable profit on their investments.
Wrapping Up: BlackBerry Should Likely Go Private
BlackBerry is far healthier now then they were last year because they are now clearly profitable and their demise has been put off indefinitely as a result. However, it is clear the pressure from investors is still having an impact on the firm and this pressure could eventually force management to make stupid decisions. As a result, if BlackBerry wants to put this all behind them, they should likely again consider going private. Only then will they be able to focus all of their effort on the strategic long-term success of the firm and avoid the distractions of an increasingly clueless or hostile pool of investors. They did try back in 2013 and the effort failed, but in the shadow of Dell’s stunning success, I’m suggesting they should try again.
In any case, BlackBerry’s strong bottom line should eclipse their top line miss because it implies a big jump in margins and product profits both of which support the argument that BlackBerry is far stronger than they were last year regardless of what the stock market performance suggests.
- IBM Power and the Importance of Measurable Results - November 24, 2023
- Windows 10/11 with Copilot: Anticipating Windows 12 - November 17, 2023
- AMD’s Market Share and Performance Update - November 10, 2023