Will Blackberry’s (NYSE: BB) Stock Rally In 2023, As Management Continues With The Turn Around?

Blackberry’s stock temporarily spiked as the company reported earnings. During the earnings call the company re-iterated its primary strategy revolving around its QNX system. In general, the uptake, and integration of QNX systems have been slow, and adoption beyond vehicles remains slow as well. But despite hiccups the stock may have found a bottom.

By: Yourstockresearch.com  1 st September 2023

Blackberry’s Stock and Business Outlook:

Blackberry reported first quarter earnings, where revenue was primarily driven by the sale of non-core patents during the first quarter. Patent sales led to gross margins coming in at 48%, and non-GAAP margins were 70%. Blackberry continues to struggle and will likely continue to struggle for a while. The company essentially has two markets, the cyber security market, driven by its Cylance product, and QNX, which caters to the automobile market. Both these divisions have struggled mainly due to the poor execution of management. It remains to be seen whether Blackberry can continue with its current strategy and still become successful. Based on the backlog there appears to be an 18-22% expectation of a ‘revenue kicker’ based on QNX’s backlog. During the latest quarter, the number of vehicles with QNX increased by 9% to 235 million vehicles. Blackberry continued to secure contracts with two out of the five biggest global automakers, for its hypervisor and acoustic middleware.

Continue reading to understand Blackberry’s stock’s future.

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What’s Plaguing the Cybersecurity Segment?

Blackberry over the years has fallen behind its competitors, competitors such as Crowdstrike, and other cyber security companies. In the years gone by Blackberry provided highly competitive, cyber security products, and, its current products are pretty good as well, but the execution has been poor. As a result, the market has largely moved on, and merely providing high-end security is no longer enough. According to surveys Cylance had the highest end-point detection rate at 98%. But issues remain with end-to-end execution.

 Private players, where most of the growth is, are looking for an integrated approach to cyber security, an area in which Blackberry has done a poor job. This has left Blackberry relying primarily on government contracts in order to maximize its revenue. While government contracts remain lucrative and are quite often long-term, they don’t provide the growth prospects that the private industry does.

Competitors continue to innovate and provide solutions for modern-day problems. This includes providing solutions for remote workers, applications, and IoT. More importantly, competitors continue to target the market better with integrated products that appeal to a wider base of clients, especially SMEs.

Blackberry’s fortunes at least in terms of cyber security have been reliant on government contracts, these contracts do have a relatively high rate of retention, but questions remain as to whether the run rate can get anywhere near what Blackberry needs in order to ensure that it can get its revenue growing again at a reasonable pace.

Blackberry Bets Big on O/S and QNX

Blackberry management continues to bet on O/S and QNX system to be the main driver of revenue and also believes that there is very little alternative to its current O/S and QNX program, making the potential for the system relatively high.

The system is an integrated OS, hypervisor, and middleware software program that provides a range of different solutions. During the latest presentation event at the Wolfe Research and Global Auto Tech Conference, management made a number of statements that alluded to the fact that QNX is limited in its ability to expand currently, with its focus on automobiles. It currently serves around 235 million automobiles but remains a rather moderate part of the overall revenue and growth prospects.

“Absolutely.  So we are – I like to – we joke about this we’re the plumbers.”Management

But, there are plenty of other markets, where the cyber security system will be needed increasingly, the two prominent ones, are medical hardware/software, and automation, both of which are witnessing significant demand increases.

Over the last decade or so the total number of robots that were installed has been around 200-250k a year, and in 2021 a record number of half a million robots were installed.  The market size is expected to get to around $35 billion by 2029, and that should provide some opportunity for Blackberry to retain some revenue. This means should Blackberry ensure a footing within the market, by moving early it could be a multi-billion dollar opportunity over many years.

Beyond the current QNX features, Blackberry is keen on adding a number of new features, which could increase revenue.

Blackberry Looks Beyond Vehicles

Industrial use is a significant opportunity for the company as well. There continues to be securing of contracts for ADAS to run machinery, in addition, the company also continues to secure contracts related to aerospace, marine, and other industrial-use devices.

The second major source of securing devices, is medical devices. The medical devices market remains quite large also. The medical devices security market is valued at around $6-6.5 billion, and according to the WHO, there were 2 million medical devices on the market, with  growth expected to be in the region of 8% a year till the end of 2030. This means potentially billions in opportunity.

Can Blackberry Increase Revenue and What’s the Competition Like?

QNX currently has very little competition, especially for the niche that it serves. From the outset, it looks like Blackberry will be able to bring in marginal consumers eventually as it looks to become a key part of industries such as the automation industry and the medical devices industry.

Blackberry believes it can provide key services for both these companies, as it looks to become a leader in middleware and provide security services to an ever-growing market of automation, specifically in manufacturing, and in medical devices which are becoming increasingly automated,

The current market for automated medical devices stands at around $44 billion meanwhile and is expected to reach around $79-80 billion in 2027, meanwhile, the medical automation market is expected to hit around $100 billion, by the time we get to 2030. Both these markets will require security to ensure both safety and customer trust. This is where Blackberry comes in. Management’s aims to expand into these areas, as they currently have little to no competition from these spaces

Growth, therefore, might be still a few years away, and investors are likely to have to wait for Blackberry to get to the next stage.

Android – one of the key sources of competition remains Android, and Android has taken market from of the O/S market from Blackberry. While Blackberry continues to invest its product, it is facing stiff competition from competitors.

Blackberry’s Financials Might Finally Turnaround

During the first quarter average recurring revenue came in at around $289 million during the first quarter, and losses significantly narrowed. The company is likely to become profitable again in the next quarter, with onboarding of new clients, and that would lead to a small operating profit of around 3-4%.

Currently, the stock trades at a relatively moderate valuation, and the current run-rate put the company’s FY23’ revenue at around $950-1000 billion. Assuming margins are maintained at around 65%, including the one-off negative margin from sale of patents, would bring the weighted average around 64% in terms of gross margin.

Blackberry Revenue Growing Again (trailing-quarterly revenue 2018-2023 $ billions – Source -Macrotrends.com)

In addition assuming around 10% growth in 2024, based on backlog would take the income to around $1.1 billion, and therefore, assuming the company is profitable by 2024, that would put the forward P/E at 60x, assuming that PAT comes in at 4%, as operating costs moderate, the valuation would be relatively high level, considering the level of growth.

Furthermore, going into 2025, assuming that revenue continues to rise by another 10%, based on improved sales, and distribution, and an assumption of net income coming in at 8%, as operating costs moderate further, that would put the 2025 forward P/E at around 30x.

The current enterprise value is estimated around at $3-3.2 billion. And from a price-to-sales (P/S) standpoint, the valuation remains expensive as well, with current P/S standing at around 4.8x.

Should growth increase to say 15%, over the 2024 and 2025 period this would still put 2025, forward P/E at around 28x. Assuming that the net profit margin comes in at a more expansive 10%, this would increase 2025 forward P/E closer to 22, making the stock a lot more attractive. For growth to advance to 15%, management’s execution on cybersecurity remains key. It would also mean bringing down operating expenses, which remain relatively high due.

Cash Flow Note

Blackberry has been cash flow negative for the recent past, but should become cash flow positive by 2024, especially if the backlogs come through. Revenue increase, and cost moderation will remain key to cash flow.

How could revenue pickup?

In order for revenue to pick up growth, after years of stagnating, management will need to execute better on cybersecurity where a lack of integration and security options, have meant that the market is increasingly looking to competition such as Crowdstrike, which offers a more expansive product.  Cylance is highly rated by the industry, but once again offering products without after-sales service and integration of a wider range of facilities, means Blackberry will struggle in this area for a bit. Meanwhile, the O/S and middleware systems continue to see a strong backlog, expanding industries and moving into newer segments will remain key to the company’s success.

Quarterly YOY growth 2018-2023,(Source: Macrotrends.com)

Management key to success

The biggest factor that is driving Blackberry’s lack of execution remains poor sales, and execution of product. Furthermore, low operating margins indicate that the company may not be turning marketing spend into sales. Execution from management, and ability to get the product competitive with alternatives such as Android.

Should You Invest in Blackberry?

Blackberry is slowly starting to turn around sales, and does have a strong backlog, but growth remains relatively slow, compared to where the valuation stands. For Blackberry to see significant growth from here on in executing across products will determine whether the company is once again investable in the short term.

Blackberry could be invested in for the long-term, and the price could rise to $7.5-$8 a share by 2024 on trader sentiment, representing around 40-50% gain, based on future earnings scope, and the market outlook for the company.


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