1 Green Flag and 1 Red Flag For BlackBerry's IoT Spinoff

Back in May, BlackBerry (BB 1.80%) said it was conducting a strategic review that could lead to the possible separation of one or more of its businesses. During its latest conference call in late September, CEO John Chen said there was a "50-50 chance" it would complete that review before his contract expires in November.

That's why it wasn't too surprising when BlackBerry recently revealed it would spin off its Internet of Things (IoT) unit in an IPO next year. The IoT unit will be operated independently from BlackBerry's remaining cybersecurity division after its IPO, but it will remain a publicly traded subsidiary of BlackBerry. In addition to generating some fresh cash, management believes that an IPO will enable BlackBerry's investors to "evaluate the performance and future potential of BlackBerry's principal businesses on a stand-alone basis while allowing each business to pursue its own distinct strategy and capital allocation policy."

Image source: Getty Images.

But will this decision actually help or harm its investors? Let's compare one green flag to one red flag for this spinoff and see where BlackBerry's stock might be headed.

The green flag: The IoT business might thrive on its own

BlackBerry's IoT business generates most of its growth from QNX, one of the world's leading embedded automotive operating systems. This segment, which accounted for 37% of its revenue in its latest quarter, suffered a slowdown over the past year as inflation, rising rates, and supply constraints stifled the growth of the automotive market.

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

However, BlackBerry still expects its IoT revenue to rise 9% to 17% in fiscal 2024 (which ends next February). During its analyst summit event this May, it predicted it could grow its IoT revenue at a compound annual growth rate (CAGR) of 18% to 22% from fiscal 2023 to fiscal 2026 -- compared to a CAGR of just 9% to 12% for its cybersecurity business.

BlackBerry believes two major catalysts will drive that growth. First, it expects the automotive market to stabilize as the macro environment improves. Second, it expects IVY -- the cloud-connected automotive AI platform that it co-developed with Amazon (AMZN 3.43%) Web Services (AWS) -- to lock in more connected vehicles.

If BlackBerry reiterates those goals when it spins off the IoT unit, its IPO could gain a lot of traction as a pure play on the connected vehicle market. A successful IPO could also generate a lot of fresh cash for BlackBerry and enable the IoT unit to thrive on its own without fretting over how its growth impacts its struggling cybersecurity unit.

The red flag: QNX faces existential threats

QNX carved out a big slice of the automotive market after it was acquired by BlackBerry in 2010, but its market share is shrinking. According to S&P Global Mobility, QNX's share of the automotive market has already declined from 18% in 2020 to 14% in 2022 and could drop to just 5% by 2027. The research firm also believes that Ford Motor Company, one of QNX's top customers, will only install QNX in about 50% of its vehicles by 2027 -- compared to more than 90% of its vehicles today.

S&P Global Mobility expects QNX's decline to directly coincide with the rise of Alphabet's (GOOG 9.96%) (GOOGL 10.22%) Android Automotive OS and the open-source Automotive Grade Linux (AGL). It expects Android Automotive's share to surge from 1% today to about 18% by 2027 and for AGL's share to rise from 14% to 23%. It also expects generic Android to still control more than a quarter of the market.

We should take those estimates with a grain of salt, but those market share losses explain why BlackBerry was so eager to partner with AWS to launch IVY. Amazon might think it can hitch a ride with BlackBerry to gain a foothold in the automotive OS market, but the rise of Android Automotive and AGL could derail those ambitious plans. All of those threats could discourage investors from scooping up shares of the IoT unit's upcoming IPO.

Does this announcement change anything?

BlackBerry's announcement doesn't really change my opinion about its stock. Its cybersecurity business, which generated 60% of its revenue in its latest quarter, continues to wither in the face of tough macro and competitive headwinds.

BlackBerry also recently sold off a lot of its patents for some short-term gains, and it doesn't look like a screaming bargain at 3 times this year's sales. Moreover, its decision to spin off its IoT unit strongly suggests it won't sell itself to Veritas Capital -- which reportedly placed a bid for the entire company in late August. The possible departure of John Chen, who arguably saved BlackBerry from becoming obsolete over the past decade, raises even more troubling questions about its long-term future. Simply put, there are still more reasons to avoid or sell BlackBerry's stock than to buy it.