So far, this year has belonged to the technology sector. The outbreak of COVID-19 has quickened the digitization process, driving the demand for the products and services provided by the tech companies. So, the increased demand has led to a rise in their stock prices. However, the pandemic has also hurt some tech companies, dragging their stock prices down.
One such company is BlackBerry (TSX:BB)(NYSE:BB), which has lost close to 13% of its stock value this year. The company provides intelligent security software and services for governments and various enterprises across different sectors.
Amid the pandemic-infused lockdown, all non-essential businesses were temporarily closed. So, it disrupted the company’s end markets, such as the automotive industry, which led to a decline in its financials and stock price. However, the company’s stock has shown some uptrend recently, with its stock price rising by over 16% since August 21.
On August 19, BlackBerry announced that it would bring its next-generation 5G devices to market in the first half of 2021. Meanwhile, yesterday, the company’s Unified Endpoint Manager software received approval from the Department of Defense Information Network as a mobile device management solution. So, these developments have increased investors’ optimism, driving the company’s stock price.
Amid the renewed interest in BlackBerry, should you buy the stock? First, let’s look at its recent performance and growth prospects.
Disappointing first-quarter performance
After reporting a top-line growth for five consecutive quarters, BlackBerry’s revenue declined in its recently completed first quarter, which ended on May 31. Its adjusted revenue fell 19.9% on a year-over-year basis to US$214 million. The shutdown of production facilities and the project delays in the automotive sector lowered its licensing revenue.
Meanwhile, the decline in its higher-margin licensing revenue caused its adjusted gross margin to contract by 4% to 71.5%. Its operating expenses more than tripled, primarily due to US$594 million of one-time or non-recurring charges. However, removing these one-time costs, the company’s adjusted EPS came in at $0.02, which was 50% higher than its previous year’s quarter.
Despite the weak first-quarter performance, BlackBerry’s outlook looks robust. With the resumption of production after the lockdown, the auto sector is beginning to recover. Meanwhile, it will take time for production to reach pre-pandemic levels. So, the company’s management expects a slow and gradual increase in revenue from its auto segment this year.
However, for the next five years, the management expects the company to beat the 11% CAGR growth estimated by McKinsey for automotive operating systems and middleware over the next decade.
Meanwhile, the surge in remote working and growth in e-commerce has increased the threat of cyberattacks, with attackers becoming more sophisticated. BlackBerry’s management expects the roll-out of the 5G service could further increase the attacks on mobile devices. So, I believe the demand for data safety and privacy solutions to grow multi-fold in the next few years, which could benefit the company.
In the first quarter, the company used US$32 million of cash. However, the company still has US$955 million of cash, cash equivalents, and investments at the end of the quarter. So, the company is well capitalized to ride out this crisis.
Despite its impressive growth prospects, the company is currently trading at 3.1 times its next four-quarter sales. So, given its robust growth prospects, strong liquidity, and attractive valuation, I expect the company’s stock could easily double in the next three years. Investors with a long-term horizon should buy the stock for higher returns.
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The Motley Fool recommends BlackBerry and BlackBerry. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.