Are Investors Overreacting to BlackBerry's Deal with Amazon?

BlackBerry's (BB 1.80%) stock recently surged to a 52-week high after it announced a multi-year partnership with Amazon (AMZN 3.43%) Web Services (AWS), the world's largest cloud infrastructure platform.

The two tech companies will co-develop and market BlackBerry IVY, a new "cloud-connected intelligent vehicle data platform" that offers automakers a "standardized secure way to read and analyze vehicle sensor data." IVY will merge BlackBerry's QNX embedded OS for vehicles with AWS' IoT (Internet of Things) and machine learning services.

The companies claim IVY will "compress the timeline to build, deploy, and monetize new in-vehicle applications and connected services across multiple vehicle brands and models" with a single platform, and be more efficient than "one-off solutions" for different makes and models.

Image source: Getty Images.

For example, IVY could track how certain safety features are utilized, then send that data back to automakers through AWS' tools. It could synchronize an EV's battery data to the cloud to find and reserve spots at third-party charging networks, or even help parents track their teenage children's driving habits.

Those applications all sound promising, but did BlackBerry's stock deserve to soar by the double-digit percentages following the announcement? Let's see what IVY actually means for BlackBerry, and whether or not its growth will offset its other weaknesses.

Why QNX matters to BlackBerry

Over the past seven years, BlackBerry phased out its smartphone business to become a pure software, services, and patent licensing company.

Its software and services unit, which generated 64% of its revenue in the first half of fiscal 2021, houses Spark, a unified suite of its endpoint and security services, and BTS (BlackBerry Technology Solutions), which includes QNX and its other wireless and security services.

Image source: Getty Images.

BlackBerry bought QNX from Harman International for about $200 million in 2010. QNX had already been widely used to power telematics systems in enterprise vehicles prior to that acquisition, but BlackBerry significantly expanded the platform's reach in the commercial auto market.

By 2015, QNX was installed in about 50 million vehicles and controlled over half the market for embedded automotive operating systems, according to IHS Automotive. Earlier this year, BlackBerry announced that QNX had been installed in over 175 million vehicles worldwide.

QNX sports its own minimal graphical user interface, but drivers usually don't see those features. Instead, QNX collects information from sensors within a vehicle and feeds that data to a car's infotainment system.

BlackBerry doesn't disclose its QNX revenue separately. However, it blamed the software and services' segment lackluster performance in the first half of the year on QNX's dependence on the pandemic-stricken auto sector:

Source: BlackBerry. GAAP basis. YOY = Year over year.

During last quarter's conference call, CEO John Chen predicted BlackBerry's software and services revenue would "sequentially improve during the second half of the fiscal year" and "return to its normal run rate" in early fiscal 2022 as the pandemic passes and the auto market recovers.

Trefis estimates BlackBerry generates about $4 in QNX revenue per vehicle. Automakers are only expected to ship about 62 million new vehicles this year, according to Statista Research. Assuming QNX is installed on at least half of those vehicles, BlackBerry would generate about $120 million in annual sales -- or nearly a fifth of its trailing 12-month software and services revenue -- from QNX this year.

Is the partnership with Amazon that meaningful?

Linking QNX to AWS initially seems like a win-win deal for both companies. BlackBerry will provide automakers a clear path between vehicle components, infotainment systems, and AWS' cloud-based storage and analytics tools -- which should extend its lead against its closest rival, Microsoft's (MSFT 1.82%) Windows Embedded, in the auto market.

For AWS, the partnership could bolster its presence in connected cars and extend its lead against its top cloud rival, Microsoft Azure. Teaming up with BlackBerry could also help Amazon by pushing Microsoft out of the auto-based cloud market.

However, investors should remember that BlackBerry already announced its partnership with AWS back in January. The recent announcement merely revealed the platform's official name and some additional details.

BlackBerry hasn't revealed if IVY will actually boost its revenue per vehicle, or if the partnership will actually help AWS more by tethering more vehicles to its recurring cloud services. It claims IVY will "unlock new revenue streams and business models" -- but we need to see some concrete plans, design wins, and financial figures before assuming it will actually boost its QNX revenue.

The bottom line

I believe BlackBerry's recent price rally was essentially a knee-jerk reaction, amplified by a short squeeze, to the headline-grabbing partnership with Amazon. But investors shouldn't assume this partnership will generate any meaningful revenue for BlackBerry, at least until it presents a clearer breakdown of this opaque business.