BlackBerry (BB, Financial) has been facing tough financial times for some time now, with its revenue on a continual downward trend, not to mention the constant losses it has been registering.
The market can be unforgiving at times, and against the ever-mounting market competition, BlackBerry is finding it hard to stay afloat. Nevertheless, it is making progress with its foray into the cybersecurity sector.
Despite Blackberry's long struggle to regain its footing, some investors still appear to believe that the turn to cybersecurity could help the company increase its profits once again. However, I believe this optimism ignores the facts of its performance thus far; it has been lagging behind its competitors for quite some time and does not appear to have any plans that would cause it to experience significant growth. Here's why I believe the stock remains very risky despite its turnaround efforts.
The good times are over
BlackBerry was once a force to be reckoned with. In 2011, the company generated revenue of $3.4 billion when it had a high penetration in the mobile phone market. However, over the last 10 years, BlackBerry has recorded a net profit in only four fiscal years as it was displaced by the advent of smartphones.
BlackBerry closed its third quarter of fiscal 2023 on Nov. 30, 2022 and posted the results on Dec. 22 last year. According to its quarterly report, the company's reported earnings per share outperformed the average Wall Street estimate by 2 cents. However, BlackBerry still faced another quarter with a net loss of 5 cents per share. The company generated revenue of $169 million, which was above analyst forecasts but fell over 8% year-over-year.
In the first nine months of the fiscal year 2023, BlackBerry generated a meager $505 million in revenue, and its net loss equaled $239 million. The company is in hot water as it only had liquidity of $505 million in the third quarter, and the rising interest rates aren't going to show mercy to unprofitable companies.
Earlier this year, BlackBerry management issued optimistic guidance to generate revenue of $886 million in fiscal 2025 and $1.2 billion in 2027, but personally, I don't see how this is going to happen.
The competition is tough
BlackBerry was once an industry leader in device and messaging patents. Thanks to its licensing business, it gained hefty revenue, forcing many of its competitors to pay royalties for any patented technology they wished to use. Not only that, but even foreign companies were willing to use the BlackBerry brand as part of their product identity by paying licensing fees for it as well. However, with technology rapidly changing and increasingly more complex, BlackBerry decided it was time to phase out this patent-licensing endeavor and sold most of these patents off. This was a big decision because BlackBerry lost a major source of income but hopefully set the plans in motion for the company's new chapter into innovation.
However, the company's cybersecurity business hasn't been doing well over the past year. The company is experiencing declining revenues while its competitors like Fortinet (FTNT, Financial), CrowdStrike (CRWD, Financial) and Zscaler (ZS, Financial) have shown mid-double-digit growths in their latest quarters. Moreover, the cybersecurity market is a tough zone and depends substantially on recurring revenue, and it has already been significantly penetrated by the companies mentioned above, along with some others.
The company's ray of hope for the future could be its Internet of Things segment. Its deal with Shanghai Dayin Technology for acoustic solutions and partnership with Magna International (MGA, Financial) for next-generation Advanced Driver Assistance Systems seem to be growth prospects in the future. However, these will not produce near-term results. For full fiscal year 2023, the company predicts that its cybersecurity revenue could remain flat, while the Internet of Things segment will be limited to 15% to 18% growth compared to 37% in the fiscal year 2022.
Takeaway
BlackBerry was once a mammoth in the mobile phone industry and recorded high profits and stock prices. Since then, the company has plunged quite significantly over the past decade. The company was falling down a bottomless pit before the new CEO John Chen began to turn things around by selling its hardware business along with legacy patents and focusing on cybersecurity.
However, BlackBerry has not seen noteworthy profits from this endeavor yet, and I don't believe it will in the near-term. Furthermore, it is competing against market players whose revenues are constantly increasing.
Keeping that in mind, the company doesn't seem to be going anywhere soon in my view. With an enterprise value of under $2 billion, the company is ripe for a takeover by other cybersecurity companies - if it can offer any competitive products worth acquiring.
