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BlackBerry (NYSE:BB) stock is a buy because BB stock is dramatically undervalued, in light of the company’s multiple, strong, potential positive catalysts. Among these potential catalysts are possible needle-moving M&A activity and its ability to take significant market share from CrowdStrike (CRWD), the leading company in the IT security space whose recent, major outage has left it vulnerable to customer losses. Additionally, the likely, strong growth of its QNX operating system can push BB stock much higher in the medium-to-long term.
BlackBerry’s safe, highly efficient QNX operating system powers the software of more than 235 million vehicles worldwide. Meanwhile, its cybersecurity business is one of the top providers of IT security to major financial institutions and governments.
The Low Valuation of BB Stock Is Likely to Rebound
With the Street currently focused on the company’s current underwhelming growth in recent quarters, the shares are trading at a low Enterprise Value-to-Sales ratio of 2.2 times. However, the positive catalysts that I outlined above are likely to meaningfully improve the company’s financial performance and boost its valuation multiples, causing the shares to climb dramatically.
Needle-Moving M&A Activity May Be on the Way
In June, Lori O’Neill joined BlackBerry’s board. When Sierra Wireless was acquired in 2022, O’Neill was a board member of the latter firm, while Phil Brace was its CEO. Now both individuals are on BlackBerry’s board. Consequently, I believe that the two individuals could be working on an M&A project involving BlackBerry.
What’s more, the company has worked very hard to split itself into two, totally distinct units: Cybersecurity and Internet of Things, which is dominated by its QNX operating system. I believe it’s unlikely that the company would spend so much time and effort on the project unless it had some sort of clear-cut financial motivation for doing so, and some sort of M&A transaction seems to be the most likely such financial motivation.
Adding to my conviction that the company is preparing for M&A was a statement by CEO John Giamatteo while speaking to an analyst on Aug. 13. Specifically, he said, “If there’s some people that are interested in certain assets of the company, maybe we’ll consider it. But I think it was harder to do that when we had I think an unwieldy portfolio of things.”
Using Seeking Alpha’s transcripts, I closely follow the public statements of the company’s executives, and this is the first time that I’ve seen one of them suggest that the firm is open to M&A and that a key motivation for splitting up the company may have been to enable such a transaction to occur.
In my opinion, the company may look to sell its cybersecurity unit, which is not growing nearly as quickly as its Internet of Things division.
In BlackBerry’s fiscal first quarter that ended in May, for example, its cybersecurity revenue fell to $85 million versus $93 million during the same period a year earlier, while its Internet of Things sales advanced to $53 million from $45 million.
One Potential M&A Scenario
BlackBerry could potentially obtain a relatively huge amount of cash for its cybersecurity unit, which features artificial intelligence-oriented systems made by Cylance. BlackBerry acquired Cylance in 2017.
Alphabet (GOOG, GOOGL) recently offered to pay $23 billion for cybersecurity firm Wiz whose annual recurring revenue (ARR) is $350 million. The offer works out to a valuation of 6.6 times ARR.
BlackBerry’s cybersecurity ARR as of the end of its Q1 was $285 million. Multiplying that by the same 6.6 times ARR at which Alphabet valued Wiz yields a total valuation of $1.88 billion. The fact that the latter figure is well above BlackBerry’s current total market capitalization of $1.4 billion indicates that BB stock is tremendously undervalued.
If BlackBerry is able to obtain close to $2 billion, it could easily retire its entire long-term debt of $194 million, making its balance sheet completely pristine. The company, which would consist of the fast-growing, QNX-dominated Internet of Things unit, could then acquire a fast-growing firm that would be an excellent complement to QNX. BlackBerry could then still afford to easily acquire a very promising start-up in the autonomous-vehicle space and market the latter firm’s products to its current customers. Entirely focused on providing high-tech products for automobiles, a rapidly growing sector, the combined company’s price-to-revenue valuation would likely be very high, pushing BB stock well above its current levels.
Other Potential, Positive Catalysts for BlackBerry
Like CrowdStrike, BlackBerry has a Managed Detection and Response (MDR) cybersecurity product. Consequently, if BlackBerry does retain its cybersecurity unit, I believe that it can take meaningful market share from CrowdStrike following the latter firm’s huge outage. Making me more confident in the latter scenario, Giamatteo recently indicated that, in 12-24 months, BlackBerry can benefit from entities using CrowdStrike less and BlackBerry more.
On the QNX front, CFO Tim Foote stated that BlackBerry was “seeing some signs that” major automakers were solving some of the difficulties that they had experienced recently regarding software development. What’s more, Foote noted that the backlog of QNX has been consistently increasing at a pace of around 20% “for the last couple of years,” and the backlog has reached a large $815 million. In light of these points, I expect the bottom line of the Internet of Things unit to expand rapidly going forward.
Finally, QNX can get a meaningful lift from the rapid expansion of Baidu’s robotaxi unit. That’s because Baidu partners with BlackBerry, while autonomous vehicles are likely to use a great deal of the software that BlackBerry provides.
Risks and More About Valuation
Given BlackBerry’s significant exposure to the Chinese auto market, the sector’s slowdown could meaningfully, negatively impact BlackBerry’s financial results. Similarly, any recession in the U.S. or a resurgence of inflation that requires interest rate hikes would likely cause the growth of the auto sector in America to drop significantly. Such developments would also negatively affect BlackBerry’s results. Finally, any successful, major cyberattack against one of Blackberry’s customers (something that has not occurred, to the best of my knowledge, has never happened) would probably have a drastic, negative impact on the financial results of its cybersecurity unit.
As I mentioned earlier, all of BlackBerry is trading well below the value of Alphabet’s offer for Wiz, a cybersecurity company. This indicates that the buyers of BB stock are getting part of the cybersecurity unit and all of the Internet of Things division for free. Further, in light of the cybersecurity unit’s opportunity to gain meaningful market share from CrowdStrike and the rapid growth of the Internet of Things unit, I believe that the stock’s overall price-to-sales ratio of 2.2 times is far too low.
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