BlackBerry (NYSE:BB) posted fiscal third-quarter earnings last week above expectations. Given the 12.39% increase in the stock price after the publication of the results on Dec. 20, the market welcomed the company's performance and management's optimism.

But a closer look shows that these results remain underwhelming and the cybersecurity software vendor will have to drastically improve its performance to justify its current valuation.

Fiscal third-quarter results were encouraging

Third-quarter revenue was $267 million, up 18% year over year. And non-GAAP (adjusted) EPS came in better than expected at $0.03. In addition to these positive results, management confirmed its full-year outlook and expressed confidence beyond the short term, thanks to the company's improved portfolio. 

For instance, management highlighted the strong potential of its security offering with its enhanced features now integrated into one single agent (software that is installed on the endpoint to protect it), which simplifies BlackBerry's security solution.

Also, during the earnings call, management said that the company's sales-team execution issues that impacted the results of the previous quarter were behind it.

Man is unlocking a virtual locking mechanism to access shared cloud resources.

Image source: Getty Images.

But a closer look reveals shortcomings

However, behind these apparently solid results, the company's performance remains unimpressive. 

BlackBerry's strong double-digit revenue growth takes into account revenue from the cybersecurity company Cylance that it acquired in February for $1.4 billion. Without this transaction, revenue would have grown by 0.9% only. Since BlackBerry's legacy hardware business became meaningless, the company's software offering contributed to the slow revenue growth.

For instance, the Internet of Things (IoT) segment (which includes the company's security software and services that secure IoT endpoints) even declined compared with last year, from $148 million to $145 million. And with 54.3% of BlackBerry's total revenue, the IoT segment represents a significant part of the company.

Besides, Cylance's performance was not outstanding. Its revenue increased by 13% year over year, and net dollar-based retention rate was 99%, which means existing customers decreased their spending with Cylance versus last year. In contrast, other cloud-based cybersecurity vendors such as CrowdStrike posted stronger revenue growth and higher net dollar-based retention rates over the last several quarters.

Also, BlackBerry's single-agent offering is not unique. CrowdStrike and other cybersecurity vendors have also been proposing a single client to manage several aspects of endpoint security. In addition, the research company Gartner positioned several competitors ahead of BlackBerry's endpoint protection solution in terms of ability to execute and completeness of vision.  

Besides, if you take into account GAAP earnings, the company's non-GAAP profits turn to a loss of $32 million, or $0.07 per diluted share. The difference between BlackBerry's GAAP and non-GAAP earnings is partly due to share-based compensation that is excluded from non-GAAP results, but this non-cash expense still represents a real cost to shareholders in terms of dilution.

Looking forward

With the strong increase in BlackBerry's stock price that followed the publication of its fiscal third-quarter results, the market values the company at an enterprise value-to-revenue ratio of 3.22 and a forward P/E ratio of 46.64. 

In the context of slow revenue growth (excluding acquisitions) and GAAP losses, these valuation ratios seem elevated. Thus, investors expect the company to drastically accelerate its slow revenue growth and increase its GAAP profits over the next several years. But given the strong performance of other cybersecurity stocks in a crowded market, such an improvement will require flawless execution.

Thus, BlackBerry's stock price doesn't offer a compelling investment proposition, and prudent investors should stay on the sidelines as long as solid improvements don't materialize.