Easing inflationary pressures and slowing interest rate hikes by the Federal Reserve of the United States appear to have improved investors’ confidence, bringing the focus back on growth stocks. Amid the improving optimism, BlackBerry (TSX:BB) is trading around 20% higher year to date. Despite the rise, the company trades at a substantial discount of 47% from its 52-week high. So, let’s assess whether the rally can continue by looking into its recent quarterly performance and growth prospects.
BlackBerry’s third-quarter performance
In the November-ending quarter (third quarter of fiscal 2023), BlackBerry reported revenue of $169 million, representing an 8.2% decline from its previous year’s quarter. A drop in cybersecurity sales more than offset the company’s strong performance from its IoT (internet of things) segment to drag its overall revenue down. The revenue from the IoT segment grew by 19% amid design wins in safety-critical automotive systems.
Although Blackberry’s revenue from the cybersecurity segment has declined year-over-year, its rebuilding efforts are delivering the desired results with a sequential improvement in churn rate. Along with the decline in its topline, higher selling, marketing, and administrative expenses drove BB’s diluted EPS (earnings per share) loss to $0.09 from $0.05 in the previous year’s quarter. The company also used around $186 million of cash for its operating activities during the quarter, including $164 million in a litigation settlement.
Meanwhile, BlackBerry had 505 million in cash, cash equivalents, and short-term and long-term investments as of November 30. So, it is well-equipped to fund its growth initiatives.
BlackBerry’s growth prospects
I expect the momentum in BlackBerry’s IoT business to continue as the EV supplier has gained substantial market share in the safety-critical automotive system, advanced driver assistance system, and digital cockpit verticles through new design wins. Additionally, the company announced last month that it had pre-integrated its IVY platform into three commercially available digital cockpit platforms.
Blackberry expects to make the IVY platform generally available from May 2023, which could accelerate third-party application development. Amid growing demand and its growth initiatives, management expects its revenue from the IoT segment to grow at a CAGR (compounded annual growth rate) of 19.8% through fiscal 2027.
The demand for cybersecurity solutions is rising amid the increased adoption of the hybrid working model and growth in remote learning. With its innovative product offerings, the company can boost its sales in the coming years despite the near-term weakness. Management expects the revenue from its cybersecurity segment to grow at a CAGR of 10% over the next five years.
With both of its business verticles projected to grow, BlackBerry’s management hopes to increase its overall revenue at an annual rate of 13%. This topline growth could improve its gross margin by 100 basis points annually. Further, management expects to break even in the next fiscal year and post positive EPS and cash flows in fiscal 2025. So, BB stock’s outlook looks healthy.
Bottomline
Given the uncertain economic outlook, I expect BlackBerry stock to remain volatile in the near term. However, long-term investors can go long on the stock, given its healthy growth prospects and cheap price-to-book multiple of 1.7.
