BB - BlackBerry: Key Considerations For The Future

2023-08-22 19:15:51 ET

Summary

• I continue to exercise caution regarding BlackBerry's turnaround efforts, despite consistent rhetoric.
• BlackBerry's cybersecurity narrative, while promising, raises questions about its competitive edge in delivering measurable ROI for enterprises.
• BlackBerry's stock valuation should not be mistaken for a bargain, considering its diverse yet uncertain operations and ongoing strategic review.

Investment Thesis

BlackBerry ( BB ) is a turnaround that is consistently in the process of turning around. And yet it seldom turns. BlackBerry has sold its highly prized patents in an effort to shore up its balance sheet with ample cash.

However, I continue to express caution that this investment is not worthwhile to deploy more capital into.

Rapid Recap

In my previous analysis, I issued a sell recommendation on BB. At the time, I argued that,

Hidden away in the middle of its press statement, BlackBerry reminds investors that more than half of its revenues this quarter came from the sales of its patent.

But is that enough to get investors to seriously consider this stock as a compelling investment opportunity? I don't think that will hold much weight.

Since I penned that contention, its stock has proceeded to move lower.

Opportunity To Step Up

BlackBerry's CEO is as bullish as ever. For instance, here's a quote from a recent conference call,

We've got a stable and focused leadership team that's driving that business in a very focused way.

And some of our other competitors, they're on their third CEO in two years. They're having some missteps. I think this -- sometimes there -- the execution issues of some of our competitors represent an opportunity for us to step in and drive growth. So, we're very excited about what the growth prospects look there.

Anyone reading about BlackBerry in 2023 must be very bullish on the company. Even though, for my part, I recommend that investors avoid deploying any further capital into this investment. The fact of the matter is that everyone makes investment mistakes. That's part of the course. Failure is never a person, it's an event. An event that becomes the foundation for the next success.

But knowing something and not acting, and not embracing the fact that BlackBerry's prospects didn't turn around, is not taking control of the process. One should take this opportunity to improve their investment strategy.

It Now Takes More Than Cybersecurity Narrative

During BlackBerry's recent conference, we are reminded that BlackBerry has a strong presence in the cybersecurity sector, with a particular emphasis on AI-powered solutions.

Now, here's my question. I know that cybersecurity is seeing massive demand. Case in point, I own Palo Alto Networks ( PANW ) (and recommend it) and follow other cybersecurity companies too. Furthermore, Friday's PANW's earnings call is a reminder that with the growth and pervasiveness of AI, AI-mounted cyberattacks will continue to increase, which will continue to see massive demand for cybersecurity platforms. Up to this point, I concur with BlackBerry's narrative.

However, I also know that the only reason why PANW is gaining significant market share in cybersecurity is that they provide very high-value ROI for enterprises.

Put another way, notwithstanding BlackBerry's strategic moves to embrace the Cylance brand in the cybersecurity space, by leveraging its reputation as a pioneer in AI cybersecurity. I'm unsure that reputation alone will be enough to entice enterprises to stick with BlackBerry's suit of products.

Presently, enterprise customers are requiring cybersecurity companies to be able to provide clear, measurable, and high ROI, and if the cybersecurity platform is able to deliver this, enterprise customers are more than willing to stick with the cybersecurity company.

But if the company struggles to provide clear ROI, there's tremendous vendor consolidation afoot in the sector that will leave BlackBerry losing market share in the one area that BlackBerry declares it's set to grow its revenues by 9% to 12% CAGR over the next 3 years.

BB Stock Valuation -- Simply Expensive

Some context to help readers. Just because BB's stock is priced at single digits per share does not mean the stock is cheap. Similarly, just because BB is down from the highs it set in 2021, also doesn't mean it's cheaply valued.

Whatever the price the stock was at last week or last year makes no difference to where it's headed towards next year.

For their part, BlackBerry noted this month that,

We think we're going to achieve breakeven in the Q4 of this current fiscal. And then moving into the next fiscal year, we move into EPS positive and cash flow positive.

That's the bull case. The consideration is that BlackBerry becomes cash flow positive in fiscal 2025. However, at the same time, BlackBerry is still undergoing the strategic review it started back in May of this year. And now we are closing out the month of August.

If there was any value in any parts of the business, and those businesses were to be sold off, then surely, whatever is left of BlackBerry would be even further away from being profitable.

Furthermore, I recognize that paying around 3x this year's revenues for BlackBerry seems cheap, particularly compared with other cybersecurity companies.

However, BlackBerry's operations are a mixture of businesses that are difficult to cross-sell into. Until there's concrete evidence that BlackBerry's profitability and cash flows start to stabilize, I continue to recommend that investors sidestep this investment.

The Bottom Line

In my analysis of BlackBerry, I maintain a cautious stance regarding this turnaround endeavor. While BlackBerry has generated cash by selling its valuable patents, I remain skeptical about recommending more capital into this investment.

Despite BlackBerry's cybersecurity narrative, emphasizing its AI-powered solutions, the fundamental question arises: can reputation alone entice enterprises to choose BlackBerry's products?

In today's cybersecurity market, customers require clear, measurable ROI, which, I believe, is crucial for BlackBerry's success. Furthermore, the stock's current low price and prior highs from 2021 don't necessarily translate to a favorable valuation.

While BlackBerry aims for profitability in fiscal 2025, its ongoing strategic review and business mix complexities caution against immediate investment, even at a seemingly low 3x revenue valuation. Therefore, I recommend investors exercise caution and consider alternative opportunities for now.

For further details see: