Protect Profits On BlackBerry Before Earnings

| About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) shares have enjoyed a nice spike over the last month, up nearly 8% in that time and over 16% since Facebook (NASDAQ:FB) acquired WhatsApp for a whopping $19 billion. The stock is likely running out of steam, at least in the short term.

Short interest in BlackBerry has declined over the last three months by almost 50%, contributing a great deal to the increase in the price of the stock. Beyond that, short-term (i.e., about two quarters) growth prospects appear relatively limited. The increase in the stock price over the last three months can be attributed almost exclusively to positive news reports related to the company (e.g., a report out from the Pentagon on government usage of BlackBerry devices, the Facebook-WhatsApp deal, and rumors that BlackBerry is the force force powering Apple (NASDAQ:AAPL) CarPlay. But all of these spurts of good news should not overshadow the implications of BlackBerry's most recent earnings report, as the company reported -$0.67 EPS and missed estimates by about 45%. Due to release their next earnings report on March 28, BlackBerry could see a sharp drop over the next month.

Considering all of BlackBerry's struggles, it would be advisable for investors to, if nothing else, protect some of their profits. The company's struggling tablet division highlights the chief weakness of the company: its current inability to compete with the rest of the tech market. After having shipped only 100,000 of its PlayBook tablets, BlackBerry has decided not to update the operating system on which these tablets run. Failure to compete in the tablet industry represents a huge loss for BlackBerry. I argue that BlackBerry's short-term weakness might not continue over time, and that the company has great opportunity to capitalize on its strengths -- those strengths just don't happen to be smartphones and tablets. The transition from making these devices to providing software services will very likely benefit BlackBerry, but the road to the completion of this transition is long and rocky.

From a more bullish perspective, BlackBerry does currently have great valuation. With less than $1 billion in debt and around $3 billion in cash, the company has the liquidity it will need going forward as it works to compete with other smartphone and tablet companies. Additionally, a PEG of 0.77 implies that BlackBerry is quite undervalued. Unfortunately, these bullish indicators are overshadowed by factors such as BlackBerry's -62.86% profit margin from last quarter. Weakening tablet sales combined with the fact that BlackBerry has been losing market share to other smartphone makers paints a grim picture for the company's earnings release later this month.

Over time, however, moves like outsourcing part of its smartphone manufacturing to Foxconn will transition BlackBerry into a once again profitable company. The release of the Z3 model smartphone will be an important test for BlackBerry's forward momentum, but I wouldn't bet on the stock without seeing some concrete forward progress first.

Until there is a firm example of BlackBerry's transition taking hold (and working), the profitability of the company is in question. With the recent significant increase in the stock price, expectations are likely very lofty for the earnings report coming out on March 28. Unless the company has a trick up its sleeve, investors are likely to be disappointed come the end of the month. That's why I suggest, even if only temporarily, protecting profits on existing BlackBerry positions and holding off on initiating new ones.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.