BlackBerry (BB -0.69%) has been one of the most volatile stocks of 2021. The software company's stock traded at just over $6 per share at the start of the year but skyrocketed to $28.77 -- its highest price in more than a decade -- during the Reddit-fueled short squeeze in late January.
Those gains quickly evaporated, but BlackBerry's stock still trades at about $9 per share, for a year-to-date gain of over 30%. Will that momentum continue next year? Let's compare the bear and bull cases to find out.
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What the bears say about BlackBerry
The bears will tell you that although BlackBerry seems to be growing, most of that growth is inorganic and unsustainable. After discontinuing its first-party smartphone business five years ago, BlackBerry aggressively expanded its enterprise software business with acquisitions. Its biggest purchase was the cybersecurity firm Cylance for $1.4 billion in early 2019.
BlackBerry's revenue rose 15% in fiscal 2020 (ending February 28, 2020), but most of that growth came from Cylance's integration into Spark, BlackBerry's unified suite of security software and services. It also generated higher licensing revenue from its patent portfolio.
But at the end of fiscal 2020, the onset of COVID-19 disrupted the automotive market. That disruption throttled the growth of BlackBerry's Internet of Things (IoT) segment, which generates most of its revenue from QNX, the most popular embedded operating system for connected vehicles in the world.
In fiscal 2021, BlackBerry's revenue declined 14% after it lapped its takeover of Cylance and struggled with sluggish auto sales throughout the pandemic. The ongoing chip shortage and supply chain disruptions exacerbated that pressure. Its enterprise software and security business also faced stiff competition from end-to-end cybersecurity service providers like Palo Alto Networks (PANW 0.11%) and CrowdStrike (CRWD -0.68%), which are both growing much faster than BlackBerry.
This year, analysts expect BlackBerry's revenue to decline 19% as it continues to struggle with those headwinds. Analysts also expect it to remain unprofitable on a generally accepted accounting principles (GAAP) basis through fiscal 2024.
As for its valuation, BlackBerry's stock still trades at seven times this year's sales -- which is a pretty high price-to-sales ratio for a company that's facing a double-digit drop in sales this year. That's probably why BlackBerry's insiders didn't buy a single share of its stock over the past 12 months.
What the bulls say about BlackBerry
The bulls believe that BlackBerry's QNX unit will recover as the automotive sector overcomes its near-term challenges. They'll also point out that QNX continues to score dozens of design wins each quarter, and that its new IVY partnership with Amazon (AMZN -1.64%). The IVY partnership will integrate QNX with Amazon Web Services' (AWS) IoT and machine learning services in connected vehicles. This could significantly boost the segment's revenue and reinforce its leadership of the auto OS market.
BlackBerry also plans to secure connected cars with Cylance's AI services. That expansion might differentiate Cylance from Palo Alto's Cortex, CrowdStrike's Falcon, and other AI-powered cybersecurity platforms.
BlackBerry is mulling a partial sale of its licensing business, which has experienced sluggish growth over the past few quarters. That sale could free up more resources to expand its automotive-oriented businesses. The company's near-term outlook looks grim, but analysts expect its revenue to rise 21% next year with a narrower loss as auto sales accelerate again. If it can maintain that momentum, then BlackBerry's stock might not be that expensive at six times next year's sales.
Which argument makes more sense?
BlackBerry's CEO John Chen brought the company back from the brink after he took the helm in 2013, but he arguably transformed a failing smartphone maker into a mediocre software and cybersecurity company. The company's dependence on the auto market for its long-term turnaround is a risky bet, especially since the ongoing chip shortage could last for at least another year. Inflation and high gas prices, which will curb the market's appetite for gas-powered vehicles, could further postpone that recovery.
BlackBerry's IVY platform sounds promising, but it will only be installed in a limited number of 2023 model vehicles next year -- so it won't move the needle for QNX or BlackBerry's total revenue anytime soon. Meanwhile, investors who are interested in buying cybersecurity stocks as hedges against inflation could simply stick with companies like Palo Alto or CrowdStrike, which aren't tethered to the macro-sensitive auto sector.
All these issues -- along with BlackBerry's declining gross margins, ongoing losses, and elevated valuation -- make it a weak investment. Furthermore, only 6% of its shares were being sold short at the end of November, so it probably won't experience another Reddit-fueled short squeeze. Investors should be very picky with the tech stocks they buy in this wobbly market. Blackberry simply has too many flaws to make the cut right now.
