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Summary

  • BlackBerry shares are up some 25% since its last earnings report in June.
  • Bankruptcy has been taken off the table and the company is rapidly improving its business performance under new leadership.
  • The rally could be in the early innings as historically successful turnarounds in the technology sector can achieve spectacular returns.

There are few more compelling or rewarding stories in the market than the successful turnaround of a tech company. Although few and far between, when a successful turnaround at a technology concern that was given up for dead does occur; the returns can be spectacular.

Some good examples of successful turnarounds over the past few years in the technology space include Micron Technologies (NASDAQ:MU), Nokia (NYSE:NOK) and Hewlett Packard (NYSE:HPQ). As can be seen from the chart below, when these turnarounds succeed the shareholder returns can be extremely lucrative.

(click to enlarge)

And of course probably the biggest turnaround over the past couple of decades is that of Apple (NASDAQ:AAPL). The company that was on the brink of disaster when Steve Jobs returned to the company in 1997 and has gone on to become the world's most valuable company by market capitalization.

These companies all take different paths to renewed relevance in the market. Micron helped drive the consolidation of the DRAM market which led to greater pricing power and discipline among the three major players that still supply the space. For Nokia it was the courage to sell off their handset business that not too long ago was the market share leader. Hewlett Packard has restored confidence by taking an ax to costs.

This leads me to BlackBerry (NASDAQ:BBRY) which is in the early stages of a turnaround after bringing a new CEO just over seven months ago. The early results from the changes engineered by new leadership at this one time tech darling have been impressive so far.

The company has liquidated old inventory, drastically cut costs and even sold real estate to build up cash reserves which now total a solid $3.1B eliminating any sort of going concern worries. Gross margins improved by 500 bps to 48% in the company's last reported quarter. More importantly, management has been stated it will achieve break-even cash flow by the end of this year.

The stock has responded to the improving picture at BlackBerry. The shares are up some~25% since BlackBerry delivered its last quarterly report on June 19th and are solidly above their 200 day moving average. However, the stock is still selling at a tiny fraction of the level it had five years ago when it was one of the dominant players in the mobile phone market (See Chart).

(click to enlarge)

The company could have upcoming catalysts in the fall when it releases new phones and operating systems and builds on last quarter's performance. Its upcoming Passport line appears to have both large screens and a keyboard as well. This should please old "crackberry" users who dearly miss having a keyboard on smartphones from other players in the space, including this author who tends to have fat fingers on my Samsung Galaxy.

Although betting on a turnaround at BlackBerry is a speculative position, it is one I am willing to take. Bankruptcy has been taken off the table and the company could have new life as an enterprise software play. Shorts still hold a significant stake in the shares (It was just under 20% of the outstanding float prior to the last earnings report) and they will have to cover at some point driving up the price of the stock.

In addition, the company seems to have brought in a dynamic and well-respected leader that is driving significant change at the company. Citron Research, who usually takes short positions in companies, is actually positive on BlackBerry and believes the shares are worth $20 a share. I am not that optimistic but believe $10 a share is the new floor for the stock and the shares could easily hit $15 a share by the end of the year if the company can continue to deliver improving results. It appears the company is at the cusp of what could be a very powerful turnaround and the risk of owning the stock is outweighed by the possibility of missing a powerful transformation that will drive impressive capital appreciation in the stock. SPECULATIVE BUY

Disclosure: The author is long AAPL, BBRY, MU. 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.