I think it would be very accurate to say that Blackberry Ltd. (TSX:BB)(NYSE:BB) is not pricing in much, if any, good news. Trading significantly below its peer group, which includes Descartes Systems Group Inc. and Kinaxis Inc., Blackberry has certainly deserved this investor apathy.
Blackberry’s undervalued stock is a good starting point for this article. Trading at a price to cash flow multiple of 13 times compared to its peer group at more than 24 times, Blackberry stock can be purchased on the cheap today. But that would do us no good if there is little hope that the company will turn itself around. So let’s look at the reasons I think Blackberry will turn itself around and is therefore a steal at today’s valuations.
Focus on rapidly growing markets
Blackberry’s focus today is on enterprise security, cybersecurity, and machine-to-machine connectivity. These are all areas that represent massive growth industries. My last visit at the doctor’s office brought home to me just how important cybersecurity is in today’s world, and the urgent need to get and keep systems protected.
The big sign at the front door read something like this: due to a ransomware attack on our systems, we do not have records of test results and patient information. The race was on in trying to recover their systems’ lost information.
Cylance is Blackberry’s answer to this cybersecurity problem. Blackberry acquired Cylance for $1.4 billion recently, elevating its game in the fast-growing cybersecurity industry. Some estimates are calling for the cybersecurity market to exceed $300 billion by 2024, and while this is a very competitive space, Blackberry is well positioned with its offering.
Results disappoint again but there are bright spots
Latest results out of Blackberry were mixed, with some good points and some bad points. Revenue growth was 22% year over year, but if we isolate Cylance revenue growth versus the prior quarter, we can see that it has hit a speedbump as it remained flat.
The biggest revenue source, making up 54.6% of total revenue, was the internet of things segment. This segment includes the previous Enterprise Services and Software (ESS) segment, and the Blackberry Technology segment (BTS). Down in the mid-teens percentage range, Blackberry’s ESS business is suffering from intense competition mostly from the likes of Microsoft, which is being super aggressive in order to capture market share.
So with the ESS sales down so much, investors have good reason to be worried. But management also blamed this weakness on execution problems at the company, as they have been revamping their enterprise sales force staff. While this will persist for a couple more quarters, it is at least something that the company can take action to improve.
Strong balance sheet and licensing revenue
On the bright side, licensing revenue, which accounts for 29% of total revenue, increased almost 27%, and the company is still projecting fiscal 2020 revenue growth of 23% to 25%. Acting as another support for the stock, Blackberry remains in a net cash position of $368 million as of the end of the most recent quarter (Q2 fiscal 2020).
Foolish final thoughts
Blackberry is certainly still in a transition phase, and with such an ambitious transition that the company began not so many years ago, it is not surprising that the process is ongoing. The new focus is on fast-growing industries of the future, and Blackberry has some good intellectual capital, patents, and its solutions and systems, which have garnered positive feedback.
Down 31% since January, Blackberry stock does not reflect much optimism. For investors that want a cheap way in on the cybersecurity industry, Blackberry stock is an attractive, albeit volatile, bet.