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Summary

  • 93 million shares of BlackBerry have been sold short (about 18% of outstanding shares).
  • The company has a fortress-like balance sheet, positive cash flows, and new Wall Street following.
  • There is pain ahead for short sellers.

BlackBerry Limited (NASDAQ:BBRY), the new darling of Wall Street, may be the turnaround story of the decade. Previously left for dead, the company surprised investors with net income of $23 million or $0.04/share in its most recent quarterly report; analysts were expecting a loss of $0.26/share. Short sellers were also expecting dismal performance by BlackBerry. As of May 30, 2014 there were 93 million shares sold short. Below are the company's recent earnings for the quarter:

(click to enlarge)

I expect BlackBerry to build upon its recent earnings surprise. That said, there are 4 reasons why shorts are doomed.

CEO John Chen Can Fight Gravity

It is well known that BlackBerry has been retrenching. However, as revenues have declined, CEO John Chen has been able to maintain gross margins. In the quarter ended August 31, 2013, BlackBerry generated revenue of $1.6 billion and gross profit of negative $374 million. In the quarter ended March 1, 2014, the company had revenue of $976 million and gross profit of $553 million - a gross margin of 57%. I mean who does that? It's the equivalent of being able to fight gravity.

However, there is a method to Chen's madness. The following chart shows BlackBerry's revenue mix.

  • Over time the percentage of the company's revenues from hardware has declined, while revenues from services and software has risen.
  • By weaning the company off its focus on handset devices where it has struggled, Chen has made BlackBerry more efficient.
  • BlackBerry now gets more revenue from fee income for managing mobile device networks for major clients.
  • As the revenue mix has changed and margins increased, the company's stock market returns have also risen.

$2.7 Billion Cash Hoard

At the end of the most recent quarter, BlackBerry had $1.7 billion in cash and equivalents and approximately $1.0 billion of short-term investments. With long-term debt of only $1.3 billion and equity of $3.7 billion (over $7/share), the company's balance sheet is practically a steel fortress.

Positive Cash Flows

BlackBerry's fortress-like balance sheet is likely to stay that way too; for the quarter-end May 2014, the company generated cash flow from operations of $302 million. It should also be noted that the company received the benefit of a $134 million income tax recovery during the period, a boon to cash flows. Pursuant to cash flows used in investing, the company received $292 million from the sale of real estate. That's a long-winded way of saying that BlackBerry has several levers it can pull to enhance cash flows.

Wall Street In Its Cheering Section

Wall Street analysts can be unforgiving when a company's management disappoints them. The opposite is also true - they can be your biggest cheerleader when management over-delivers like Chen has; there have been several "buy" ratings on the company since its earnings release. I expect continued affirmation from Wall Street to offer support to the stock, further stymying shorts. Even known short-seller Citron Research is bullish on BlackBerry. It's only a matter of time before legions of other BlackBerry short-sellers capitulate.

Conclusion

BlackBerry has right-sized its cost structure amid revenue declines, delivering a positive earnings announcement in its most recent quarterly report. With a focused business strategy that plays to the company's strengths, positive cash flows and support from Wall Street analysts, shorts are doomed.

Disclosure: The author is short BBRY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own puts held over from a previous straddle trade

Source: BlackBerry: 4 Reasons Why Shorts Are Doomed