For the last three years, BlackBerry (NYSE:BB) has had huge achievements, even as its previously thriving cell phone business faded into oblivion. But during most of that time, Wall Street has not given BlackBerry stock the respect it deserved.
Last week, however, BlackBerry reported third-quarter results that showed that it has become meaningfully profitable. The company also proved that its core businesses are definitely growing rapidly and that it has many strong upcoming catalysts, along with increased credibility.
In the wake of those strong results, the Street may be finally ready to start recognizing BlackBerry for what it is: a rising cybersecurity and Internet of Things powerhouse with tremendous upcoming growth.
BlackBerry Was Underappreciated
Starting in 2016, the company’s QNX operating system was adopted by multiple, big-time players in the auto industry, from Ford (NYSE:F) to auto-equipment heavyweights Delphi (NYSE:DLPH) and Denso. Its security products were used by many big multinational banks and huge government agencies, including the Pentagon, the Treasury, the Department of Energy, and the Department of Homeland Security. And its revenue started climbing again.
Yet most analysts and most investors shunned BlackBerry stock, preferring to focus on the trees of the minutiae of its quarterly financial results rather than the forest of the company’s tremendous achievements and wonderful outlook. Short-sellers also loved to prey on BB stock.
First, investors gave BB stock the cold shoulder because its revenue was shrinking. Then, in most of 2018 and most of 2019, they didn’t like BB stock because its enterprise software and services missed expectations and showed a bit of weakness.
The Street was also spooked because the company spent a great deal of its cash on buying artificial intelligence-oriented cybersecurity company Cylance, whose growth subsequently slowed meaningfully. Finally, some analysts were worried that the company’s licensing revenue would dry up.
The BlackBerry Stock Opinion Revolution
BlackBerry’s Q3 results may have eased much of the Street’s fears. Its software and services revenue jumped an impressive 26% year-over-year, easing worries about slow top-line growth. Its enterprise software and services revenue dropped slightly YoY, but appeared to have risen versus the previous quarter, according to research firm Raymond James.
Cylance’s revenue came in at a solid $40 million, even though it increased only 13% YoY. Licensing revenue rose 13% YoY, More than 90% of BlackBerry’s software and services revenue was recurring. That means that the company has customers under contract to deliver software and services revenue in upcoming quarters that are equal to more than 90% of the revenue it generated last quarter. BB’s cash and equivalents rose $32 million quarter-over-quarter.
But, perhaps more important were the company’s forward-looking comments, BlackBerry raised its full-year earnings per share guidance to 8 cents from 6 cents. Although 8 cents may not sound like much, it’s actually close to $55 million, which is pretty meaningful. Of course, nothing impresses Wall Street as much as profits.
Additionally, CEO John Chen reiterated that he expects Cylance to be profitable starting in FY21, which begins in March. He also stated that Cylance had won a number of deals with large companies, while there was strong demand for a new managed services offering released by the unit. Chen added that cross-selling and synergies between Cylance and other parts of BlackBerry would increase going forward.
After BlackBerry released its Q2 results in September, Chen said that changes in the company’s sales team had hindered its ability to close enterprise software and security deals. But he sounded much more upbeat on Friday. After the Q3 results were released, the CEO said the company’s new products and increased focus by the sales team had enabled it “to drive more business.”
Furthermore, for the first time, BlackBerry’s QNX operating system, which has become quite lucrative for the company, appears to be poised to generate meaningful revenue beyond the auto industry. Of QNX’s 31 design wins in Q3, 11 were in auto and 20 were in other sectors, Chen noted.
Moreover, the CEO said that QNX ‘s revenue from the other sectors will be significantly higher and take a much shorter time to materialize after orders are received than its revenue from auto companies. The fact that QNX is beginning to exploit non-auto opportunities in a meaningful way probably made many investors more upbeat on BlackBerry stock.
Also likely increasing optimism towards BB stock, the company’s asset-tracking business, Radar, gained meaningful traction in Q3. It added 15 new customers last quarter, and it received repeat orders from multiple customers, including Lowe’s (NYSE:LOW) and Bimbo’s Bakeries.
Since BlackBerry reported its Q2 results in September, BB stock mostly traded in a range of $5.oo-$5.50. The shares jumped as high as $6.55 on Friday and are trading around $6.45 at the moment.
Moreover, BlackBerry announced that it had launched a partnership with CACI International (NYSE:CACI), one of the largest IT systems integrators based in the DC area which does a huge amount of business with the federal government.
Under the deal, BB and CACI will “provide the first secure and certified mobile communication applications, utilizing BlackBerry’s SecuSUITE secure voice and text,” Chen announced. The partnership certainly increases BlackBerry’s credibility as a top cybersecurity company.
Many times in the past, after BB reported strong results, BlackBerry stock would give back most of its gains on the day after its results were reported. The fact that BB stock kept the lion’s share of its gains on Monday is encouraging.
Although there appeared to be no major upgrades of BlackBerry stock in the wake of the results, Bank of America, which had been one of the biggest bears on the name, did upgrade the shares to “neutral” in November and kept that rating on the shares in the wake of Friday’s results. Additionally, TD securities kept its $10 price target and a “buy” rating on the shares. Those are minor victories, but they are victories nonetheless.
The Bottom Line on BlackBerry Stock
BlackBerry reported strong results that appear to have calmed Wall Street’s concerns on many fronts, including its revenue growth, future profitability, and the Cylance deal. The expansion of QNX and the increased traction of Radar also appear to have excited some investors. Although analysts seem tepid, there are signs that they’re coming around.
BlackBerry stock may have finally turned a corner.
As of this writing, Larry Ramer owned shares of BlackBerry stock.
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