BlackBerry (BB 1.09%) posted its earnings report for the second quarter of fiscal 2023 (which ended on Aug. 31) on Sept. 27. The Canadian cybersecurity and Internet of Things (IoT) software maker's revenue fell 4% year over year to $168 million, but still beat analysts' estimates by $2 million.

Its adjusted net loss narrowed from $33 million to $29 million, or $0.05 per share, which also cleared the consensus forecast by $0.02. However, BlackBerry's stock still slipped after the report and remains down nearly 50% so far this year. Is it time to take the contrarian view and buy BlackBerry?

A cybersecurity professional inspects a tablet.

Image source: Getty Images.

What are BlackBerry's priorities?

BlackBerry was once one of the largest smartphone makers in the world. But it lost that market to iPhones and Android devices, stopped producing its own phones in 2016, and pivoted toward cybersecurity and IoT software instead.

BlackBerry's cybersecurity business now revolves around Spark, its diversified suite of enterprise security services. It significantly expanded Spark by acquiring the cybersecurity company Cylance in early 2019.

Its IoT business generates a large portion of its revenue from QNX, the world's most popular embedded OS for connected vehicles. QNX is also used to power medical devices, industrial robots, and transportation systems.

BlackBerry previously generated a lot of revenue from its licensing business, which collected licensing fees and royalties from its legacy mobile and messaging patents. It also licensed its brand to third-party device makers. However, it started to gradually phase out that volatile business and agreed to sell most of its patents for $600 million earlier this year. As a result, its "licensing and other revenues" segment declined significantly throughout fiscal 2022 and the first half of fiscal 2023.

How fast is BlackBerry growing?

BlackBerry generated 66% of its revenue from its cybersecurity business in the second quarter. Another 30% came from IoT, while the remaining 4% came from its licensing business. Here's how those segments fared over the past one-and-a-half years.

Metric

Q2 2023

Q1 2023

FY 2022

Cybersecurity revenue growth (YOY)

(8%)

6%

(3%)

IoT revenue growth (YOY)

28%

19%

37%

Licensing & other revenue growth (YOY)

(60%)

(83%)

(77%)

Total revenue growth (YOY)

(4%)

(3%)

(20%)

Data source: BlackBerry. YOY = year over year.

The post-pandemic recovery of the automotive sector boosted BlackBerry's IoT revenue, but the sluggish growth of its cybersecurity unit and the downsizing of its licensing segment completely offset that growth.

Its cybersecurity woes are worrisome, because its larger cybersecurity competitors -- which include Palo Alto Networks (PANW 0.22%), CrowdStrike (CRWD -0.76%), and Zscaler (ZS 1.63%) -- have all been generating high double-digit sales growth over the past year. It's a bright red flag when an underdog is growing more slowly than the market leaders.

Another pressing issue is the pending sale of its patent portfolio to Catapult IP Innovations. A recent report claims the deal could crumble after its lead financier, Third Eye Capital, abandoned the transaction. BlackBerry ended the second quarter with just $642 million in cash, cash equivalents, and marketable securities, so the $600 million sale could have nearly doubled its cash reserves and freed up more resources for its core cybersecurity and IoT businesses.

Can BlackBerry stabilize its gross margin?

BlackBerry generated 57% of its gross profit from its cybersecurity segment in the second quarter. Another 39% came from the IoT segment, while the remaining 4% came from its licensing and other division. Its two core businesses both struggled with year-over-year gross margin declines during the quarter.

Metric

Q2 2023

Q2 2022

Cybersecurity gross margin

55%

59%

IoT gross margin

82%

83%

Licensing & other gross margin

67%

60%

Total gross margin

64%

65%

Data source: BlackBerry.

Once again, BlackBerry's cybersecurity business looks weak compared to its industry peers. Palo Alto, CrowdStrike, and Zscaler posted gross margins of 68%, 74%, and 79%, respectively, in their latest quarters.

Those lower gross margins suggest that BlackBerry doesn't have much pricing power in the crowded cybersecurity market. That pressure, along with the slow demise of its higher-margin licensing business, will likely offset its higher IoT margin.

Is there any reason to buy BlackBerry in this bear market?

For the full year, analysts expect BlackBerry's revenue to decline 4% to $689 million with a net loss of $424 million, compared to a slim net profit of $12 million in fiscal 2022. That's a gloomy outlook, but the stock still doesn't seem cheap at four times this year's sales.

BlackBerry sports a lower price-to-sales ratio than its three aforementioned cybersecurity peers, but it's also growing a lot more slowly. If we look beyond the cybersecurity sector, it's easy to spot faster-growing tech companies that are trading at lower valuations. For example, Twilio (TWLO -0.62%), the cloud-based communications services company that is expected to generate 36% sales growth this year, trades at just three times that estimate.

A short squeeze briefly made BlackBerry a meme stock last year, but its sleepy 5.7% short interest at the end of August suggests that won't happen again. Simply put, BlackBerry still isn't worth buying at these depressed levels.