Is BlackBerry Limited Stock a Buy Now?

BlackBerry (BB 1.80%) posted its latest earnings report on Sept. 28. For the second quarter of fiscal 2024 (which ended on Aug. 31), the Canadian tech company's revenue fell 21% year over year to $132 million but missed analysts' estimates by $15 million. It narrowed its net loss from $54 million to $42 million, which trickled down to an adjusted loss of $0.04 per share and cleared the consensus forecast by a penny.

BlackBerry's stock barely budged after the company released that mixed earnings report, but it remains down about 5% over the past 12 months. Should investors buy this out-of-favor tech stock today?

Image source: Getty Images.

It's struggling to restart its core growth engines

BlackBerry stopped producing its own smartphones seven years ago to focus on the expansion of its cybersecurity, Internet of Things (IoT), and licensing divisions. It acquired Cylance in 2019 to beef up its cybersecurity business, expanded its IoT business by installing its embedded OS QNX into more cars, and leveraged its massive portfolio of patents to generate fresh licensing fees from other companies.

During the second quarter, BlackBerry generated 60% of its revenue from its cybersecurity business, 37% from its IoT business, and the remaining 3% from its licensing and other division. But as the following table illustrates, its cybersecurity and IoT businesses suffered severe slowdowns over the past year.

Data source: BlackBerry. YOY = Year-over-year.

The cybersecurity segment struggled as the company struggled to close several big government deals in this difficult macro environment. Stiff competition from cybersecurity leaders like Palo Alto Networks (PANW 0.91%) and CrowdStrike (CRWD 2.03%) likely exacerbated that pain. It still expects its cybersecurity revenue to rise 2%-8% for the full year, but that would require a significant acceleration over the next two quarters.

The IoT business' growth decelerated on a year-over-year basis as the macro challenges and supply constraints disrupted the auto market, but its revenue actually rose sequentially in the second quarter as some of those headwinds weakened. It expects its IoT revenue to rise 9%-17% for the full year. Over the long term, it expects IVY -- the cloud-connected automotive AI platform it co-developed with Amazon Web Services (AWS) -- to further drive the segment's growth.

As for BlackBerry's licensing business, it continues to shrink following the sale of a large chunk of its patent portfolio to Key Patent Innovations (KPI) earlier this year. That sale significantly boosted its licensing and other revenue with an initial cash payment of $170 million in the first quarter of fiscal 2024, but investors shouldn't count on that tiny segment to offset the slower growth of its cybersecurity and IoT businesses over the next few quarters. 

BlackBerry believes that from fiscal 2023 to fiscal 2026, it can grow its revenue at a compound annual growth rate (CAGR) of 12%-15%, driven by a 9%-12% CAGR for its cybersecurity business and 18%-22% CAGR for its IoT business. However, I believe that long-term outlook seems a bit too bullish relative to its recent growth rates.

Its gross margins are stabilizing, but its stock isn't cheap

On the bright side, BlackBerry's adjusted gross margin expanded 130 basis points year over year and 1,640 basis points sequentially to 64.4% in the second quarter. That expansion was entirely driven by its rising IoT gross margins, which suggests QNX still has plenty of pricing power in the automotive market.

However, that could change over the next few years if more automakers adopt Alphabet's (GOOG 9.96%) (GOOGL 10.22%) Android Automotive OS or the open-source Automotive Grade Linux (AGL) instead of QNX. According to S&P Global Mobility, QNX's share of the automotive market could plummet from 14% in 2022 to just over 5% by 2027.

Analysts expect BlackBerry's revenue to rise 36% in fiscal 2024, but a lot of that growth will be driven by its one-time gain in licensing revenue in the first quarter. After lapping that gain, they expect its revenue to drop 15% to $730 million in fiscal 2025. With an enterprise value of $2.7 billion, BlackBerry still trades at four times next year's sales.

That EV/Revenue ratio might seem low compared to Palo Alto Networks or CrowdStrike -- which trade at nine and 12 times this year's sales, respectively -- but both of those cybersecurity leaders are growing faster and generating stable profits.

Is it the right time to buy BlackBerry?

It's easy to see why the bears shrugged at BlackBerry's latest report. Its core businesses are still struggling, and it's reiterating ambitious growth targets that seem unrealistic in this difficult macro environment. It's also glossing over its competitive threats in the cybersecurity and IoT markets. So for now, investors should steer clear of BlackBerry's stock.