Is BlackBerry’s Software Pivot Low-Hanging Fruit?

As the iconic Canadian smartphone strategy reaches end-of-life, our analyst thinks the new business is overvalued

Ruth Saldanha 11 January, 2022 | 2:29PM
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BlackBerry SmartphoneRIP Blackberry (the phone, not the company). Bay Street’s once-ubiquitous cellphone shut down services for good on January 4th, after the company announced it would stop updating operating systems and software for its devices. It also announced at the time that its transition to a software company was complete.

"As of this date, devices running these legacy services and software through either carrier or Wi-Fi connections will no longer reliably function, including for data, phone calls, SMS and 9-1-1 (emergency) functionality," the BlackBerry website stated.

While the news may have signalled the end of an era for hardcore Blackberry phone fans, Morningstar analyst William Kerwin thinks the development is immaterial to the business, given that the phones in question are over five years old, and newer phones licensed under the BlackBerry name (though not made by BlackBerry) are not impacted.

He maintains his $9 fair value estimate for no-moat BlackBerry after the firm reported fiscal third-quarter earnings modestly above his expectations, and guided for fiscal fourth-quarter results modestly below his prior forecast.

“We’re pleased to see steady sequential growth for BlackBerry’s software and services sales through fiscal 2022 thus far, but we view cybersecurity and Internet of Things revenue trending below the firm’s initial fiscal year guidance as disappointing, even despite headwinds in its QNX auto business," he said in a note.

"We still expect robust growth from BlackBerry’s QNX auto sales, and nonetheless view continued design win acceleration as positive in the long term. Even after a small pullback following the release, we continue to view shares as overvalued."

Work Cut Out

Given its tumultuous past and relative lack of operating history as a software company, Kerwin assigns BlackBerry a very high fair value uncertainty rating. Since 2014, the firm has relied on M&A to pivot its business toward software. It encountered nine straight years of revenue decline, ending in 2020. Its ability to generate meaningful organic growth going forward will be paramount to its success.

“BlackBerry competes in highly fragmented and competitive markets, against some of the largest companies out there. It may be difficult for BlackBerry to maintain or steal market share from companies such as Microsoft, IBM, and VMware with 10 or more times the revenue and R&D budget that it has," he said.

"BlackBerry encounters the opposite problem with its QNX software, where it must compete with freely available Android and Linux operating systems. In these markets, it will need to continually innovate ahead of the competition to maintain pricing power, and thus market share, over these alternatives."

He also thinks that BlackBerry faces environmental, social, and governance risks in the forms of human capital, data privacy and security.

“BlackBerry’s success depends on acquiring and retaining cutting-edge artificial intelligence engineers to innovate; any loss of talent could hamper its competitive position. Also, as a cybersecurity provider, any security breach of BlackBerry’s software could compromise sensitive customer data, or result in danger for cars and drivers operating with its QNX software. We think BlackBerry has established strong competencies in security that keep these risks at bay, but it must consistently stave off threats going forward.”

Bulls Say

  • The "Spark" suite provides the widest breadth of endpoint capabilities BlackBerry has offered to date and should appeal to enterprises looking to consolidate their software vendor lists;
  • BlackBerry’s focus on security gives it an advantage in regulated industries, like government, healthcare, and financial services;
  • BlackBerry IVY—the result of a partnership with Amazon Web Services—could create a revolutionary software ecosystem for connected vehicles, allowing OEMs to process, analyze, and monetize massive amounts of vehicle data.

Bears Say

  • BlackBerry doesn’t have the scale, breadth, or name recognition to compete in enterprise software with giants like Microsoft and VMware;
  • BlackBerry has been losing share in its primary markets of unified endpoint management and automotive infotainment;
  • BlackBerry has yet to prove its ability to grow organically as a software company.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $9
Star Rating: 2 Stars
Economic Moat Rating: None
Moat Trend Rating: Stable

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackBerry Ltd11.43 CAD0.53Rating
BlackBerry Ltd9.04 USD1.12Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor, Morningstar.ca