Former smartphone manufacturer and current software-focused company BlackBerry (TSX:BB)(NYSE:BB) has experienced a wild year so far. Reddit’s retail army pushed the stock price up to eye-watering levels in January. Since then, the stock has been in a downward spiral, down 70% from the peak. After excluding the short squeeze, the stock is still sitting on 23% gains year to date.
There could be room for more gains for Blackberry in the five years to come. The cyberspace, internet of things (IoT) and, the endpoint security market are on the cusp of a growth explosion. But is BlackBerry well-placed to take advantage of this growth in the next five years? Can BlackBerry clear its name this time and once again become the market leader?
BlackBerry is reeling from the COVID-19 pandemic impact
BlackBerry’s fiscal 2021 earnings showed a detrimental impact of the pandemic. The company’s biggest revenue source, the software and services segment’s revenue fell 10% year-over-year to US$621 million. BlackBerry’s QNX platform is present in 175 million vehicles.
And because of the pandemic-induced slowdown in the automobile industry and a global shortage of semiconductor chips, the company lost $75 million in recurring royalties from the BlackBerry QNX. The company expects the global semiconductor chip shortage and the pandemic to keep affecting sales of the QNX platform until 2022 at least. The COVID-19 will continue to impact its earnings for some time.
The company’s revenue has dropped steadily since 2017, falling to $621 million from $1.3 billion. The pandemic’s impact has only compounded this downward trend. This downtrend has got investors worried if it can survive in the highly competitive software space.
Testing times lie ahead
BlackBerry has already experienced failure in a highly competitive environment. Back in 2007, when it was a smartphone maker, the onset of Apple iPhones and Android phones forced the company to transform into a software-based company.
Now, the company is competing in a highly competitive industry once again. Technology is evolving rapidly, and BB has to continue to innovate, or its products could once again be at the risk of becoming obsolete.
BlackBerry is operating in a high-growth market and has proved itself in the mobile communication space. Now it has to prove itself in edge computing and automotive space. Grand View Research expects the global unified endpoint management software market to increase at a compounded annual growth rate (CAGR) of 32.2% between 2020 and 2027. Here, BlackBerry will compete with big players like IBM and Microsoft.
Global Market Insights expects the automotive operating systems (OS) market to rise at a 15% CAGR between 2020 and 2026. Here, Google’s Android Automotive OS will offer stiff competition to BlackBerry’s QNX platform. Recently, Google and Ford announced a partnership where millions of Ford cars will use Google’s platform. The deal comes into effect in 2023, and BlackBerry would be foolish not to consider Google as their direct rival.
To sum up, BlackBerry will have to compete with mega-cap companies in the coming years. In the tech space, it is not impossible for a small-cap company to beat market leaders in their own game. Advanced Micro Devices beat Intel after being an underdog for 50 years. But for such a remarkable turnaround you need an unbeatable product. While BlackBerry’s QNX is a good product, it is not unbeatable. It lost For’s contract to Google’s Android Automotive OS. This loss makes me apprehensive about BlackBerry.
You can expect some volatility in BlackBerry’s stock price as COVID-19 effects continue to hamper its revenue. And even if the company shakes off the pandemic’s effects, there is stiff competition from tech giants in the coming years. I believe BlackBerry could continue to underperform the market over the next few months unless its new products beat the competition.
Billionaire investor Prem Watsa’s holding in BlackBerry makes me keep the stock in my watchlist and so should you. If it proves to be an underdog like AMD, you can jump into the rally when it shows the first signs of a miracle turnaround.
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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.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Apple. Tom Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Microsoft. The Motley Fool recommends BlackBerry and BlackBerry and recommends the following options: short March 2023 $130 calls on Apple and long March 2023 $120 calls on Apple.