Is It Too Late to Buy BlackBerry Stock?

BlackBerry's (BB 1.80%) stock soared 18% on Aug. 25 amid reports that it had received a takeover bid from the private equity firm Veritas Capital. The Canadian tech company is also said to be talking to other potential suitors.

Those reports aren't too surprising given BlackBerry hired Morgan Stanley and Perella Weinberg Partners in May to evaluate its portfolio, explore potential divestments, and consider other strategic options. But reports about a Veritas deal are unconfirmed, and details are lacking. So is it too late to buy BlackBerry's stock -- which remains down nearly 20% over the past 12 months -- after that news-driven pop?

Image source: Getty Images.

BlackBerry's post-smartphone turnaround stalls

BlackBerry's brand was once synonymous with smartphones, but it lost the market to Apple's iPhone and Alphabet's Google Android devices throughout the 2010s. Under CEO John Chen, who took the helm in 2013, BlackBerry retreated from the smartphone market, stopped producing its own phones in 2016, and expanded its cybersecurity and Internet of Things (IoT) software businesses to remain relevant. It also milked its massive portfolio of patents for royalties and licensing fees.

But a look at BlackBerry's growth over the past year shows its cybersecurity revenue has shriveled year over year for four consecutive quarters, and its IoT revenue declined sequentially and year over year in the latest quarter.

The sole growing segment in its most recent quarter was its "licensing and other" division, but its revenue only soared because the company sold some of its patents to Key Patent Innovations (KPI). KPI also signed a licensing deal with BlackBerry that could generate "up to $900 million" in revenue over an unspecified period of time.

Data source: BlackBerry. YOY = year-over-year.

BlackBerry's core cybersecurity and IoT businesses are still in trouble, even though they might bring in some volatile licensing revenue over the next few quarters.

The cybersecurity segment, which BlackBerry significantly expanded with its acquisition of Cylance in 2019, is struggling to keep pace with larger, more diversified, and faster-growing cybersecurity leaders like Palo Alto Networks, Fortinet, and CrowdStrike. Meanwhile, the macro headwinds are driving companies to rein in their software spending, which makes it even more difficult for BlackBerry to gain new cybersecurity customers.

BlackBerry's IoT segment generates most of its growth from QNX, the world's most popular embedded OS for connected vehicles. It suffered a slowdown over the past year as the macro headwinds and supply chain constraints disrupted the auto industry, but the company expects new projects -- especially BlackBerry IVY, the cloud-connected automotive AI platform that it co-developed with Amazon Web Services (AWS) -- to fuel its near-term recovery and long-term growth.

A murky future as a stand-alone company

BlackBerry expects its cybersecurity business to stabilize in the second half of fiscal 2024 (which ends in February 2024). Its IoT revenue could also rise again once the macro environment improves and the automotive market stabilizes.

BlackBerry insists that from fiscal 2023 to fiscal 2026 it can grow its top line at a compound annual growth rate (CAGR) of 12% to 15%, supported by the 9% to 12% CAGR of its cybersecurity business and 18% to 22% CAGR of its IoT segment. Yet those long-term forecasts seem too rosy for a company that has suffered annual revenue declines over the past three years.

As its revenue growth stalls out, BlackBerry's gross margin is shrinking. It ended fiscal 2023 with a gross margin of 63.9%, compared to 65% in fiscal 2022 and 72% in fiscal 2021. The company also turned unprofitable based on both generally accepted accounting principles (GAAP) and non-GAAP measures in fiscal 2023.

In contrast, larger cybersecurity leaders Palo Alto Networks and Fortinet are both profitable by GAAP and non-GAAP measures. BlackBerry could struggle to dig itself out of this hole if it loses its pricing power in the crowded cybersecurity market and the auto market experiences a softer-than-expected recovery.

Will BlackBerry be acquired?

With an enterprise value of $3 billion, BlackBerry is valued at less than 4 times this year's sales. That low valuation might attract some buyers, but I suspect they'll want to acquire its cybersecurity, QNX, and licensing divisions separately.

So for now, it's impossible to tell what the final offer will be. If we don't hear any more news, BlackBerry's stock could slump again -- and its bidders could wait for an even lower price before pouncing. That's why I think it's too late to buy BlackBerry shares.