CA - BlackBerry's Stunning Pivot

2023-09-25 10:20:49 ET

Summary

• BlackBerry Limited has become a leader in the IoT and cybersecurity markets, with a 90% market share in critical event management.
• The IoT market is experiencing exponential growth, creating a need for robust cybersecurity solutions that BlackBerry can capitalize on.
• BlackBerry's QNX technology and strategic partnerships position it for significant revenue growth in the connected car market.
• With strategic partnerships and a focus on data analytics and cybersecurity, the IVY platform positions BlackBerry as a leader in automotive technology innovation.

Investment Thesis

Remember BlackBerry Limited ( BB ), the former smartphone giant? BlackBerry has evolved and is now steering through the fast lanes of the Internet of Things (IoT) and cybersecurity. Following my latest coverage , BB had a speculative buy rating, returning nearly 43% and around 58% YTD, significantly outperforming the market. Even though I booked all my profits from BB's position, I remain confident in the stock's outlook and momentum, reaffirming the buy rating.

BlackBerry's Meteoric Rise in IoT, Cybersecurity, and the Future of Connected Cars

BlackBerry has successfully transformed itself into a leader in two synergistic and high-growth markets: the IoT and cybersecurity. While these markets are distinct, they are interconnected and mutually reinforcing, providing BlackBerry with a unique advantage. For instance, regarding critical event management, BlackBerry is a trusted provider in this domain with a 90% market share in the U.S. government sector.

Notably, the IoT market is experiencing exponential growth, with an estimated 29 billion endpoints expected by 2030, representing a CAGR of 12%. As IoT adoption surges, so does the threat landscape. The cost of cybercrime is projected to reach a staggering $90 trillion by 2030, growing at a CAGR of 26%. This exponential increase in cyber threats underscores the critical need for robust cybersecurity solutions. Therefore, with its suite of products and services, BlackBerry's cybersecurity division may capitalize on these trends .

Looking forward, BlackBerry has set ambitious yet achievable revenue targets for fiscal 2026. These targets serve as a catalyst for the company's ability to capture a substantial share of the IoT and cybersecurity markets over the medium term. It targets a revenue CAGR of 18–22% for IoT and 9–12% for cybersecurity.

Finally, BlackBerry's QNX technology has emerged as a linchpin in the automotive industry's transformation. The growth trajectory of QNX is remarkable, with an impressive CAGR of 31% (fiscal 2014–2023). BlackBerry IVY (a strategic partnership with CerebrumX) is expected to drive significant revenue growth starting in 2024, capitalizing on the burgeoning connected car market.

Will BlackBerry's Q2 Earnings Defy Street Estimates Yet Again?

The street estimates the upcoming quarter's earnings (Q2 fiscal 2024, to be released on September 28, 2023 ) to be -$0.05 per share at a revenue of $146.95 million (-60.6% QoQ and -12.5% YoY).

However, due to its fundamental strengths in its segments, BlackBerry can surpass the revenue and profitability estimates with a decisive surprise, as it did in Q1 2024. Lastly, the long-term annual estimates for the top and bottom lines are progressive.

How BlackBerry's IoT and Software Innovations Defy Street Estimates and Shape the Future

The street estimates for the upcoming quarter are not overwhelming. Lower expectations can be attributed to specific temporary factors. However, BlackBerry may continue to progress fundamentally across its key business units (IoT, IVY, and cybersecurity).

BlackBerry's IoT business unit is critical to the company's value growth. The industry-wide shift toward software-defined vehicles ((SDV)) is the primary reason for lower expected revenue. Several leading automotive players are revising their development plans to prioritize SDVs. However, this shift is favorable for BlackBerry in the long run, as it underscores the growing importance of software in the automotive sector.

The macroeconomic environment is the second factor affecting IoT revenue, which has impacted regional production volumes and royalty revenues. Understanding that this impact varies across original equipment manufacturers (OEMs) and geographic regions is essential. For instance, production in China faced softness earlier in the year, but other regions like North America, Europe, Japan, and Korea have shown steadier output. This mixed impact reflects broader market dynamics and does not signify a fundamental weakness in BlackBerry's IoT business.

Moreover, for several reasons, BlackBerry's long-term prospects in the IoT business unit remain robust. BlackBerry may capitalize on the solid secular trends driving the IoT market. These trends include the increasing integration of software in vehicles, the proliferation of edge computing, and the need for complex safety-critical software stacks—all areas where BlackBerry excels.

QNX software, a foundational component in many vehicles, is embedded in over 235 million vehicles globally. This impressive figure indicates BlackBerry's leadership position in the automotive sector and continues to secure design wins with top automakers. The IoT unit is not limited to automotive applications, and it has successfully expanded into industrial and medical verticals, winning contracts for various applications, from industrial machinery to medical equipment.

Lastly, BlackBerry's next-generation kernel claimed significantly higher performance, particularly in scaling up to 64 cores. This development aligns perfectly with the growing demand for edge computing in IoT applications, ensuring BlackBerry's market relevance in the long term.

VY Platform Gears Up for Automotive Transformation

BlackBerry's IVY platform, designed to cater to the evolving needs of the automotive industry, is undergoing significant transformations. One key development is releasing a more standalone and scalable version of IVY. This strategic move simplifies the adoption process for automakers, enabling a wider range of proof-of-concept trials. The reduced need for extensive technical support makes IVY a more attractive and accessible solution for automotive manufacturers.

Additionally, BlackBerry's strategic investments, such as the partnership with CerebrumX, enhance IVY's capabilities. CerebrumX's AI-driven solutions that analyze vehicle data on driver behavior and vehicle health align perfectly with the data analytics potential of IVY. This partnership strengthens IVY's value proposition and positions it as a leader in automotive data analytics.

Another critical partnership is with Upstream Security, a renowned automotive cybersecurity firm. By leveraging IVY's edge capabilities to pre-process data in near real-time, BlackBerry enhances vehicle cybersecurity while reducing cloud overhead. This strategic alignment with a cybersecurity expert reinforces IVY's focus on safety and security in the automotive sector, a key long-term driver.

Finally, BlackBerry's choice of an edge-to-cloud architecture for IVY has proven advantageous. This approach distinguishes BlackBerry from cloud-only players who have struggled to achieve profitability. The shift toward edge computing aligns with the industry's growing reliance on localized data processing, making IVY a forward-looking platform .

Cybersecurity Unit: Fortifying Digital Defenses

BlackBerry's cybersecurity unit is another pillar of its long-term success. Total contract value ((TCV)) billings consistently outpace revenue, indicating a robust pipeline and BlackBerry's ability to secure multi-year deals. The focus on the government vertical has been mainly contributing to steady growth.

Also, BlackBerry has secured contracts with various government institutions in North America and internationally. This reflects the trust in BlackBerry's cybersecurity solutions for safeguarding critical infrastructure and sensitive data. Progress in the renewal channel programs, particularly in North America, suggests increased engagement with partners and the potential for expanding the customer base.

Notably, independent assessments have validated BlackBerry's Endpoint Protection Platform ((EPP)) as a top performer in detection rates and resource efficiency. Such recognition enhances BlackBerry's reputation in the cybersecurity space.

Finally, BlackBerry's sale of the non-core portion of its patent portfolio to Key Patent Innovations has generated significant initial cash payments and potential future revenue. This strategic move not only boosts BlackBerry's financial position but also allows it to focus on core areas of expertise.

BB Stock Technical Follow-Up

Since the last coverage with a buy rating, the stock has yielded around 43% in price return. Interestingly, the current price has provided a proper close over the moving average ((MA)) and exponential moving average ((EMA)) of 200 days and taken vital support at the average lines (EMA200 and MA200).

This suggests that the stock can be accumulated to intensify the long-term position, with $5.35 being the pivot level for the stock price, and similarly, $3.26 serves as long-term support.

The targets, $8.75 and $12.10, can be considered short- and mid-term resistance levels based on Fibonacci (retracement or expansion). Overall, the stock is technical at ideal buying levels and can partially be exited at the resistance levels to lock in some solid returns.

Conclusion

In conclusion, BlackBerry has positioned itself as a leader in the high-growth markets of IoT and cybersecurity, capitalizing on their interconnection. BlackBerry's IoT unit remains strong, benefiting from the industry shift towards software-defined vehicles and other key trends. QNX technology solidifies its leadership in the automotive sector, while the IVY platform's strategic transformations enhance its value proposition.

In cybersecurity, BlackBerry's government contracts and top-performing solutions highlight its strengths. With sequential improvements in revenue and EPS estimates, BlackBerry's future looks favorable. From a technical standpoint, the stock's recent performance and support levels suggest an opportunity to remain bullish on the stock.

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