There is a vast difference between a great company and a great investment. Any company can have the potential to deliver growing profitability. But it may lack investment appeal if its share price already reflects its prospects and fails to offer a margin of safety.
This situation appears to be becoming increasingly commonplace in the current bull market. Investor expectations about the economy and company earnings are high. As such, share prices are moving to levels that are increasingly difficult to justify.
A prime example of this is technology company, Blackberry (NYSE: BB). Its shares have surged 40% since the start of the month, as some investors have become extremely excited about its future financial performance.
A changing strategy for Blackberry
Many readers may be familiar with the name ‘Blackberry’. After all, it was a dominant player in the mobile phone market a decade ago. Its smartphones were highly coveted and achieved cult-like status among some consumers.
Since then, it has experienced numerous challenges that have negatively impacted on its financial performance. Today, it is a loss-making business. But it is widely expected to return to a black bottom line in the next financial year because of its turnaround strategy. This entails the business shifting its focus towards cyber security products that utilise artificial intelligence and have a wide application.
For instance, the company’s products are used in 23 of the top 25 electric vehicle (EV) manufacturers in the world. Together, they have 68% of the global EV market. This could provide significant growth opportunities for Blackberry. Global sales of EVs are forecast to grow by 70% in 2021 and then by over 50% per annum through to 2025, as new regulations and changing consumer tastes act as strong catalysts.
In addition, Blackberry is investing heavily in products that can be used in autonomous driving settings. As such, its long-term growth opportunities appear to be attractive in an era where an increasing use of technology is likely to become more prevalent across a variety of industries.
A great investment over the medium term?
Blackberry’s revised strategy is expected to yield a significant improvement in its financial performance. For example, it is forecast to move from a loss per share of 5 cents in the current year to earnings per share of 6 cents next year. Further improvements to its bottom line could realistically be delivered if it is able to evolve its current strategy.
However, the company’s appeal from an investment perspective may be far more limited. Its recent share price rise means that it now trades on a forward price-earnings ratio of 232 using next year’s forecast earnings. It seems investors have factored in its expected move from loss to profit, as well as its potential to deliver further profit growth over the coming years.
Therefore, it may be prudent to wait for a lower share price. Or, consider other options within the technology sector, and other industries, that offer a mix of strong profit growth potential and an attractive valuation that includes a margin of safety.
