BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) did it. With aggressive austerity, the company generated a profit in its last quarter. That deserves some serious applause from everyone because this company was one that many thought would never to amount to anything.
But it’s that profit that now has me a little concerned. BlackBerry nearly cut its research and development (R&D) in half. Fourth Quarter fiscal 2014 R&D spending was US$246 million. Its fourth quarter fiscal 2015 R&D spending was US$134 million. That’s a significant amount of costs that have been cut.
Now, in many ways, I’m okay with a company cutting costs to try to get to the point where it can really grow. But BlackBerry is trying to become a big player in the Internet of Things (IoT), and it’s going to need to invest to fight.
Everything is connected
The IoT is a new field in which many technology companies are jockeying for position. Imagine a world where you can take your blood pressure at home and then transmit that data to your doctor so she can look at your records and make a diagnosis. Or imagine a world where your refrigerator can communicate with your car while you’re driving home to let you know you’re out of milk.
IoT is the interconnection of everything. However, when everything is so connected, a lot of data can be stolen. BlackBerry is an expert at security, so it’s got a powerful and compelling niche that it can use to dominate in the IoT marketplace.
What’s so exciting about this new sector is how much potential money there is in it. According to the CEO of Cisco, the IoT sector could be a $19 trillion market. Naturally, BlackBerry won’t get anywhere near that amount, but even a sliver of it would make a huge change for the company.
But if it is cutting that R&D budget so aggressively, will it be able to fight for that sliver?
Software revenue is growing
I actually think BlackBerry will be okay. The software division saw revenue grow 24% quarter over quarter. That means that it now accounts for 10% of the total revenue, which is up 2% from the previous quarter. If the growth in software continues and the hardware division stabilizes, the future for BlackBerry should be able to grow over the next few years.
More importantly, because it is already so well known as an expert in security, it should be able to gain a foothold in the IoT sector. However, if it continues to cut costs to attempt profitability, BlackBerry may be doomed for good.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned.