Better Tech Buy: BlackBerry Stock vs. Enghouse?

After more than a decade of underwhelming gains, is BlackBerry stock a better buy compared to Enghouse stock in 2023?

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The tech selloff surrounding equity markets has led to lower valuation multiples across the board. The tech-heavy Nasdaq index is still trading 26.5% below all-time highs, while the pullback for several technology stocks is much more.

For instance, TSX tech stocks such as BlackBerry (TSX:BB) and Enghouse (TSX:ENGH) are down 82% and 45% below recent year highs. While equity indices are expected to remain volatile in 2023, the ongoing bear market allows you to go bottom fishing and buy quality stocks at a bargain.

Let’s see which TSX tech stock, BlackBerry or Enghouse, is a better buy in March 2023.

BlackBerry stock

BlackBerry has underperformed the broader markets for well over a decade. The Canadian tech giant exited the smartphone manufacturing business and pivoted towards providing software and cybersecurity solutions to enterprises.

While investors are patiently waiting for a turnaround, BlackBerry has flattered to deceive, as its sales have fallen from US$1.04 billion in fiscal 2020 (ended in February) to US$690 million in the last 12 months.

The company’s gross margins have declined by 10 percentage points in this period, and it reported an operating loss of US$194 million in the past four quarters. In the November quarter, BlackBerry reported revenue of US$169 million — a decline of 5% year over year.

During the earnings call, BlackBerry’s chief executive officer (CEO) John Chen emphasized that the company is in the midst of negotiating a few government deals, which should translate to top-line growth in the future.

BlackBerry also unveiled a slew of automotive software products and systems development partnerships earlier this year at the Consumer Electronics Show. Its potential list of customers for these products includes Dongfeng Motors, a China-based electric vehicle manufacturer, Italian car component manufacturer Marelli, and Germany-based automobile parts manufacturer Bosch.

In the last year, BlackBerry recorded a free cash outflow of $284 million and ended the November quarter with $450 million in cash. Valued at four times forward sales, BB stock remains a high-risk bet, given its negative profit margins and tepid revenue growth.

Enghouse stock

One of the best-performing stocks on the TSX, Enghouse Systems has returned 428% to shareholders since March 2013.

In fiscal 2022, the company’s revenue fell to $427.6 million, compared to $467.2 million in the year-ago period. Enghouse explained its revenue was impacted by a fall in sales from Vidyo, unfavourable foreign exchange rates, and the shift from on-premise solutions towards a SaaS (software-as-a-service) model.

Its adjusted earnings before interest, taxes, depreciation, and amortization stood at $140.6 million, indicating a margin of 33%. In fiscal 2022, Enghouse invested $72.3 million in research and development and deployed $20.2 million towards acquisitions.

Analysts now expect ENGH stock to increase sales to $483 million in 2024. Comparatively, adjusted earnings are forecast to rise to $1.73 per share. So, Enghouse stock is priced at five times forward sales and 25 times forward earnings, which is steep given growth forecasts are not too encouraging.

Bottom line

If I have to choose a winner between BlackBerry stock and Enghouse stock, I would pick the latter, as it delivers consistent profits and pays investors a forward yield of 1.7%. But investors remain bullish on BB stock and expect shares to gain close to 18% in the next year. Alternatively, Bay Street believes Enghouse stock is trading at a premium of 10%.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enghouse Systems. The Motley Fool has a disclosure policy.

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