Is BlackBerry Ltd Stock Set For Another Post Earnings Rally?

BlackBerry Ltd (NYSE:BB) is scheduled to report its third-quarter earnings on Wednesday. Should you buy BB stock ahead of earnings?

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John Chen led software sans hardware company BlackBerry Ltd (NYSE:BB) is all set to report its fiscal 2018 third-quarter earnings on Wednesday, before the opening bell. Going into earnings, BlackBerry stock is up more than 17% since the last quarter earnings. BB stock has shown a lot of promise in 2017 and is by far having its best run in recent times, up more than 57% in the year-to-date. Some external events such as the huge legal award from Qualcomm have also aided BlackBerry stock’s fortunes. The strong second-quarter earnings in which the software company delivered QoQ revenue growth for the first time since Q3 2016 have increased the hopes for a turnaround to be just around the corner. The big question now is, can BlackBerry once again deliver strong earnings this time around as well? Is BB stock set for another post-earnings rally?

What to expect from BlackBerry Q3 2018 earnings?

The Wall Street consensus expects BlackBerry to breakeven in terms of non-GAAP earnings of 0 cents a share on revenue of $216.6 million. The Wall Street consensus implies revenue decline of  28%, on a year-on-year basis and EPS decline of 2 cents from the year-ago EPS print of 2 cents a share. BlackBerry CEO, John Chen had updated the FY 2018 revenue guidance in the last quarter earnings call, which came in at $920 to $950 million. BlackBerry has a strong history of beating earnings estimates having beaten the estimates in all of the last 8 quarters. So, an earnings beat is on the cards.

Will QNX and Radar finally come to the party?

If BlackBerry needs to have its turnaround story kick-started, its high time that both QNX and Radar deliver. BlackBerry’s revenues have been shrinking over the last three years. The software revenues are yet to make up for the loss of hardware revenue. The Technology Solution segment, which houses QNX and Radar saw flat year-on-year revenues in the last quarter, though sequentially this segment saw an improvement of $2 million (in revenue). This needs to change quickly as QNX and radar are at the center of bullish thesis around BB stock. The recent non-exclusive design agreement partnership with Qualcomm (NASDAQ:QCOM) for QNX software has once again raised expectations. The company’s software segment is seeing some traction as in Q2 BlackBerry saw 3,300 enterprise orders in the quarter. However, the Enterprise software and services revenue was flat YoY in the second quarter at $102 million.

The revenue estimates suggest another sequential decline which it avoided in the last quarter. Further, the company has a poor record of beating revenue estimates, having beaten revenue estimates only 3 times in the last 8 quarters. However, BlackBerry cannot afford to miss the top line number after the recent run-up in share price. A miss here could be detrimental. The top management which guided software revenue growth to be in the range of 10-15%, needs to hit higher end to boost investor confidence.

Prospect of a Short Squeeze?

BlackBerry stock still features among the favorite list of shorts. Short interest in BB stock has edged closer to 6 month high levels with more than 46.7 million shares shorted making up 9.1% of the float. The days to cover is very high at 18 days. A strong earnings could result in a short squeeze. The post-earnings rally after Q2 earnings is also believed to be aided by some short covering. A similar thing this time around cannot be entirely ruled out. However, it would be prudent for investors to not to bet on this factor solely.

Bottom line.

Investors would be better off taking a wait and watch approach with BlackBerry stock ahead of earnings. BlackBerry needs to deliver on the recurring items of its revenues as till now it has posted strong results on account of one-off items such as the licensing revenues. BB stock is trading at a sales multiple of 5x which is very near to its 5-year high value, the company needs to deliver strong results to sustain that high valuation. At the same time, the technical set up of the stock has improved. If one takes a look at the BB stock technical chart, it has managed to close above its 50-day simple moving average in a bullish move on Friday. The 50-day SMA has acted as a strong resistance level in the recent past. Prior to that, BB stock saw a bullish Moving Average Convergence Divergence (MACD) crossover with the signal line. If the upward momentum continues it could see another bullish MACD crossover with the ‘0’ centerline as early as next trading session.

The technical landscape is improving ahead of earnings which is a welcome sign for BlackBerry investors. However, with BB stock trading above its average analyst price target of $10.32 and the recent run-up in the share price, the Ontario, Canada based software company needs to come out all guns blazing to set the stock on another post-earnings rally.

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