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Bill Maurer
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I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have... More
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  • BlackBerry: The Disaster Continues

    Last week, BlackBerry (NASDAQ:BBRY) reported its fiscal second quarter earnings. To say the quarter was awful might actually be charitable. The hardware business struggled mightily, leading to a revenue number that didn't even hit half a billion dollars. As a result, BlackBerry shares hit a new 52-week low on Monday, and they might not bottom until the company's recent moves start to kick in.

    Could it have been any worse?

    For fiscal Q2, BlackBerry reported revenues of $490 million, down more than 25.5% sequentially and 46.5% over the prior year period. Analysts cut their Q2 average forecast by more than $80 million between earnings reports, but the company didn't come anywhere close to the $611 million they were looking for. The company also reported a non-GAAP loss of $0.13, four cents worse than the street was expecting.

    The company recognized revenues on just 800k phones, well below the 2.1 million seen in the prior year period. As a result, service revenues were actually the largest revenue segment in the quarter. That's not good since service access fees are declining at a 15% or more sequential rate. In the end, the company has seen quarterly revenues drop by more than two-thirds in the past two years, as seen in the chart below.

    (Source: BlackBerry financial information page)

    One last ditch effort for hardware sales?

    When looking at a few key issues before the earnings report, I wondered what the future of the hardware business was. While the company remains committed to the BlackBerry operating system, there won't be any more BB10 phone launches this year. The company finally announced that it will be launching an Android based device later this year, although it probably shouldn't have given the phone a name that reminds some of a toilet.

    In the latest quarter, BlackBerry reported barely over $200 million in hardware revenues. Apple (NASDAQ:AAPL) is selling as many phones per day as BlackBerry is in a quarter, with Apple's phones selling for two to three times the price. If the Android phone is not met with tremendous enthusiasm, I think BlackBerry must finally realize its true future and ditch the hardware business. While this might depress revenues in the short-term, the low margin business just isn't worth the time and effort right now.

    Cash being put to use, but slowly:

    Just a few days before earnings, during the current fiscal Q3, BlackBerry closed its $250 million purchase of AtHoc, a crisis communications platform. The company is also in the process of acquiring Good Technology, a deal I covered in my preview article. That deal may close late in this quarter, and could provide $160 million in GAAP revenue during the first year post-close.

    The company's board has also authorized up to 15 million additional shares that can be purchased under the buyback program. While this is an incremental positive, this is still a small number of shares and there still is the convertible debt overhang of 125 million shares. BlackBerry spent about $47 million on share repurchases in Q2, buying back 6 million shares. The average price paid could be lower this quarter if the company takes advantage of the recent selloff.

    The company is finally putting its cash to use, although I would have been happier if some of these moves had been made a year ago. If you look at the Good deal, it was announced in early September, after fiscal Q2 ended. Management should have had a decent idea where revenues were at that point, so maybe that was the final straw that really kicked management into action. Now that quarterly revenues are under $500 million, management finally thinks the top line number will grow sequentially. Of course, the company was looking for growth several quarters ago, and that has not happened yet, so credibility is a question here.

    These are positive moves but they are small and will take time to pay off. Buying back a few million shares per quarter won't really move the needle. The Good deal will provide some revenues, but not enough to offset the $200 million plus a quarter that service access fees are currently bringing in (and declining). If the company does eliminate the hardware business, we could be looking at revenues running at a $1 billion or so annual pace a year from now. That would be down roughly 95% from the peak reached earlier this decade.

    Final thoughts:

    It was another awful quarter for BlackBerry as revenues plunged below $500 million. Phone sales were terrible, and I don't know if the company's Android device will be able to save the struggling division. The company is finally putting some of its cash to use, but deals will take time to pay off and share repurchases are small. In the end, things are not where they need to be and investors have sent shares to new lows as a result.

    Tags: BBRY, earnings
    Sep 28 5:47 PM | Link | 2 Comments
  • GoPro: Searching For A Bottom

    One of the worst performing stocks in recent months has been GoPro (NASDAQ:GPRO). The camera maker has been a popular target for short sellers, and recently Barron's detailed a case for further downside. However, GoPro's results are still coming in quite strong, and the valuation seems fairly attractive at these levels. Today, I'll look at where things stand for GoPro today, and why shares could be close to bottoming.

    Barron's a little late?

    Recently, GoPro shares tumbled after Barron's stated that shares could fall to $25 as the latest product launch was underwhelming and competition continues to increase. Some have worried about the role of Apple (NASDAQ:AAPL), which has significantly upgraded the cameras on the iPhone this year. Earlier this year, GoPro shares sank when Apple was granted a patent for a sports camera.

    In my opinion, the Barron's call was a little late. The stock had already lost 2/3 of its value when the piece was published. With a stock in the mid $30s, falling to $25 doesn't seem like much for shares that traded for nearly $100 at their peak. Investors may also find this an interesting risk/reward scenario - while Barron's says the stock could fall to $25, the analyst community sees the stock worth $70 a share. With shares currently under $32, there seems to be a lot more potential upside there.

    Expectations on the rise:

    Investors will need to decide who they trust more, but there is one fact I can certainly deliver. GoPro's analyst estimates for this year and next have been soaring so far this year. As you will see in the table below, forecasts for both revenues and non-GAAP earnings have become substantially more positive in recent months.


    **2016 growth rates based on 2015 estimates on that specific date.

    At this point, you can make a case for buying GoPro strictly on valuation. The company currently trades for about 15 times next year's expected non-GAAP EPS, before subtracting out the company's cash position. For a name with revenue and earnings growth expected in the high teens to low 20s next year, after a big year in 2015, I think that valuation is quite reasonable.

    Analysts are looking for just 12% revenue growth in Q4, which seems a bit low. On Monday, GoPro just announced a new Wifi enabled camera that goes for just under $200, compared to the entry level model without Wifi that goes for about $130. The company also reduced the price of its Hero4 Session camera. Bears say this is a negative, but the Session had fewer features than the Silver model it was equally priced with.

    In last year's Q4, the company's revenues averaged about $264 per device shipped, but 4 of the 6 current models go for prices higher than the average, and that excludes accessories. With expectations so low for Q4, there seems to be some upside to current forecasts. International sales for the company are booming, and China is now a top ten revenue country for the firm.

    Remember, this is a company that's still looking to monetize all of the content its users produce. This could be the big story of 2016 for GoPro, which could help combat expectations for slower revenue growth (as the company works off higher base numbers). A stock trading for around 15 times non-GAAP expected EPS with forecasted growth rates in the high teens or low 20s (percentage wise) seems quite attractive in my opinion. Don't forget, the company has over half a billion in cash on the balance sheet, which could be used for some meaningful acquisitions.

    Short interest doubles again:

    Even before the Barron's article came out, there were a number of investors bearish on the stock. GoPro shares took a tumble, and as you will see in the chart below, short interest skyrocketed. The latest value of nearly 19.7 million shares is up 103.5% in the past month, and this is a new all-time high. Based on float data from Yahoo Finance, a little more than 32% of the float was short at the latest update. If GoPro's results continue to impress, there is major short squeeze potential here.

    (Source: NASDAQ short interest page)

    Final thoughts:

    GoPro shares have not done well recently, but they certainly seem attractive at these levels. The company is still experiencing strong growth, which makes the valuation quite reasonable. Short interest has more than doubled to a new high. Earlier this year, massive short covering led to a large rally, which could easily happen again. The company just announced a new camera to bolster its holiday 2015 lineup, and Q4 expectations are somewhat low. In the end, I think GoPro shares are close to bottoming, and those looking at the long-term might want to consider this name again.

    Tags: GPRO, long-ideas
    Sep 28 11:16 AM | Link | Comment!
  • Apple Could Blow Past $10 EPS In Fiscal 2016

    Technology giant Apple (NASDAQ:AAPL) is about to close out its fiscal 2015 period. When looking forward to analyst estimates for the next fiscal year, I seem to see a bit of a disconnect. The street is currently looking for 4.7% revenue growth and 6.9% EPS growth. However, with Apple's buyback running at full blast, the company will see a fair amount of EPS growth from a reduced share count. In my opinion, this leads me to believe the current analyst EPS average of $9.76 is way too conservative. Today, I'll detail how Apple could easily pass $10 a share in fiscal 2016.

    Looking at the buyback:

    Apple has the largest buyback on the planet currently, one reason why many investors are in the stock. With the share count coming down quite a bit, earnings per share are helped significantly. Using Apple's financial information page, the following chart shows the year over year decrease in Apple's quarterly diluted share count since the beginning of fiscal 2014.

    *Based on my current projection for quarterly share count.

    As the share count goes lower and lower, the impact on EPS gets greater and greater. When the diluted share count ("DSC") was at 6.5 billion shares, a 100 million reduction in the DSC was a decrease of 1.54%. With Apple about to pass 5.7 billion shares, the DSC decrease is now 1.79%.

    In the chart above, you may notice that the DSC hasn't come down as much in recent quarters. Part of the reason was that the significant rise in share price meant less shares were repurchased. As Apple detailed in its most recent 10-Q filing, open market purchases cost $128.08 a share in fiscal Q3 2015, up substantially from $85.23 in the year ago period. With Apple shares coming back down in the past month or two, the number of shares repurchased should start to rise again.

    My overall point here is that I think it's quite reasonable to expect at least a 4.5% decline in the DSC during fiscal 2016. Analysts are currently looking for $9.13 in EPS during fiscal 2015, so adding 4.5% to that would put the following year's value at $9.54, holding all else equal. With the average fiscal 2016 EPS estimate being $9.76 currently, that means analysts expect just 22 cents in EPS gains, despite a nearly $11 billion increase in expected revenues. That's why I think $10 in EPS seems likely, and there's a few other items that back up my thesis.

    Reduced operating expenses as a percentage of revenues:

    I believe Apple has a chance for EPS upside primarily due to a bit of expense management. My belief is that fiscal 2016 will see a lower operating expense percentage (of revenues) than fiscal 2015. As you can see in the chart below, this year and last were a bit higher than the last three years, a trend I think might subside in the near term.

    *Based on first 9 months of fiscal year and analyst estimates for Q4.

    Why do I think operating expenses will come down? The main reason has to do with research and development expenses. In the chart below, you can see how R&D expenses (as a % of revenues) have skyrocketed in recent years. In fiscal 2012, Apple spent just 2.16% of revenues on R&D, but fiscal 2015 is likely to come in around 3.40%. I believe a lot of this R&D has been due to the newest set of products we've seen: the Apple Watch, larger screen iPad, Apple TV, Music, etc. I could see the R&D percentage coming down in fiscal 2016 to perhaps 3.00%, which would be 40 basis points of improvement. Based on my projections, that gain would be equal to around 13 cents of EPS.

    *Based on first 9 months of fiscal year and analyst estimates for Q4.

    A few gross margin tailwinds:

    Apple's largest expense is the cost of its products, and mostly the iPhone which represents a majority of revenues. There is usually a gross margin increase when Apple launches the "S" version of the iPhone. This year, some of that benefit might be offset a little thanks to significant upgrades like Force Touch, more memory, and the camera upgrades.

    One item that's good for margins is Apple basically making the 16GB model of the iPhone obsolete. Higher resolution pictures need more storage space, 4K video needs a lot of space, and the operating system takes up perhaps a quarter of your storage. If you really want to take advantage of the phone's features, you really need to buy the 64GB model (or even the 128GB). But as the link above points out, going from 16GB to 64GB of storage costs Apple about $20. Apple charges an extra $100 for the higher storage model, implying a lot more profits.

    Apple also could benefit from currency fluctuations in fiscal 2016. A Bernstein analyst thinks the cut in the Chinese yuan could help the company's bottom line going forward. Also, the strength in the dollar from late 2014 / early 2015 has subsided quite a bit. Apple faced about six months in fiscal 2015 where the Dollar Currency Index ("DCI") was about 20% higher than a year earlier. Apple reportedly raised prices to combat this issue in a number of countries, with some products' prices jumping 15% or more.

    The current level of the DCI represents about a 12% increase over the end of Apple's prior fiscal year. If the DCI stays at its current level, the year over year increase will be down to about 1% by the end of January 2016. I don't think Apple will dramatically cut prices for its products then, meaning some sizable tailwinds for average selling prices, revenues, and gross margins.

    By my calculations, Apple analysts are expecting fiscal 2016 gross margins to be down about 20 basis points over this current year. If Apple just holds gross margins steady, or even increases them, EPS could really rocket higher. If Apple can hold its net profit margin steady in fiscal 2016, the average analyst revenue estimate would imply about $10.21 in EPS, 45 cents above the EPS average.

    What this all means:

    If Apple comes in around the current revenue estimate for fiscal 2016, than I can easily see the company blowing past $10 in EPS. This would mean the stock is currently trading at around 11 times earnings, a sizable discount to the S&P 500 (NYSEARCA:SPY) at around 17 times or even a comparable name like Microsoft (NASDAQ:MSFT) at 15.5.

    If I give Apple even a 13 multiple, my above value for EPS gives me a price target of $132.73, or about 16% upside from current levels. I think that's a fair price for the stock, given some growth going forward combined with a massive capital return plan. In the end, I think analysts are very conservative with their EPS estimates currently, which I believe will lead to Apple producing more beats and upside in the stock as well.

    Tags: AAPL, long-ideas
    Sep 21 2:07 PM | Link | Comment!
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