BlackBerry (NYSE:BB) stock is down roughly 20% so far in 2018 as the former smartphone maker continues to make its slow transition to a new specialty: software security services. Though share prices have been pulled out of the basement they were in just a few years ago, BlackBerry is still a speculative bet at this point. As time passes, the uncertainty surrounding the tech company is fading and giving way to dialogue around a legitimate turnaround story, but the price tag might still be too high.

What's happened this year

Long gone are the days of smartphone relevance at BlackBerry. Though the company still makes a few bucks from device and system access sales ($17 million during the second quarter of fiscal year 2019), the tech outfit is all about software services these days. Though expenses related to its transformation remain elevated, those are gradually coming down and operations are once again knocking on the door of profitability.

With legacy business almost an insignificant portion of the overall picture, what's left over is the software segment -- driven by security for mobile applications, enterprise software, and connected auto solutions security. You can see in the table below how BlackBerry did in the most recently reported quarter.

Metric

Quarter Ended Aug. 31, 2018

Quarter Ended Aug. 31, 2017

YOY Increase (Decrease)

Enterprise software and services

$88 million

$91 million

(3%)

BlackBerry Technology Solutions

$49 million

$38 million

29%

Licensing, IP, and other

$56 million

$56 million

0%

Handheld devices

$5 million

$16 million

(69%)

System access fees

$12 million

$37 million

(68%)

Total revenue

$210 million

$238 million

(12%)

Data source: BlackBerry. YOY = year over year. 

The outlook for the rest of the fiscal year remains positive, too. For the current fiscal year, BlackBerry thinks its software revenue will be up 8% to 10%, and software and service billings up by double digits. That provides hope that, while the overall picture still isn't pretty, BlackBerry's future business is on solid footing.

Carving a niche in the security world

The software industry is a crowded one, but BlackBerry has been able to carve out a niche for itself. Its focus on securing end-point devices -- like phones, tablets, and other internet-connected equipment -- for enterprises has been a winning strategy. BlackBerry is also a prominent player in the auto industry, where it supplies various security solutions for technology that runs the modern vehicle.

In fact, BlackBerry has grown large enough in this space that it's now an acquirer of smaller companies. Recently, BlackBerry announced the purchase of Cylance, a machine learning and artificial intelligence company that it will use to complement its existing products for enterprise and automotive. The price tag? $1.4 billion in cash.

An illustration in blue of a shield protecting data.

Image source: Getty Images.

The outlook for BlackBerry appears sound, especially as the legacy smartphone business disappears. What remains is a recurring revenue business that generates good gross profit margins -- 77% in the last reported quarter. However, sticking a fair valuation on BlackBerry is tricky because the company has run at an operating loss over the last year (negative $166 million), and free cash flow over the last 12 months is negative $191 million. Wall Street analysts are optimistic that profits are coming; on a one-year forward basis, price to earnings is a rich 55.8. Double-digit growth for the software services bread and butter is good, but hardly worth paying several decades' worth of profits for.

A lot is thus riding on BlackBerry continuing to grow its top-line sales, offering the promise of profit later as the company concludes its transformative efforts. In that respect, the stock could be a good deal when comparing it to other software-based security outfits. BlackBerry's price-to-sales ratio sits at 5.7, with software sales increasing 20%, 18%, and 4% last year and during the first and second quarters of this year, respectively. As mentioned before, the company sees growth in that area finishing out the current year up 8% to 10%.

By comparison, some of BlackBerry's peers in the enterprise security software space carry much higher valuations. Fortinet (NASDAQ: FTNT) has grown revenue 20% through the first three quarters of its fiscal year and has a P/S ratio of 7.5; Palo Alto Networks (NYSE: PANW) reported 29% higher revenue in its recently concluded 2018 fiscal year and a P/S ratio of 7.1; and Check Point Software (NASDAQ: CHKP) rose 3% through three quarters of 2018 and its P/S ratio stands at 9.4.

It isn't an apples-to-apples comparison, but it does illustrate the relative value of BlackBerry compared to similar companies out there. Nevertheless, the company is still working through its old business, and overall growth is still in decline as newer operations haven't yet offset legacy ones. The stock is a volatile one and isn't for the faint of heart, so while BlackBerry is less speculative than it was a year or so ago, I'm not ready to jump aboard quite yet -- at least until the company can demonstrate that its new endeavors can run at a profit.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends BlackBerry, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.