TSX tech stocks have lost 2% of their value, while BlackBerry (TSX:BB) has lost 35% in the last 12 months. Growth stocks like tech have been down since last year, mainly due to rapidly rising interest rates. However, when it comes to BB’s underperformance, the critical cause is its poor operational and financial show.
What is ailing BlackBerry stock?
BlackBerry stock has risen 25% so far in 2023. However, that does not mark a beginning of a firm revival. It provided a business update and preliminary fiscal fourth-quarter (Q4) 2023 quarterly earnings on March 6. The numbers once again came subdued, sending BB shares 3% lower. The company will release its quarterly earnings on March 30.
According to its preliminary results, BlackBerry is expected to report total revenues of US$151 million for the quarter that ended on February 28, 2023. This marks a concerning 20% drop year over year. BlackBerry’s declining revenue growth has been a crucial issue, weighing on its stock for the last few years. If the company reports revenues as per its preliminary results, this will mark its 10th consecutive quarter of a revenue decline.
Tech companies are generally businesses with fast-growing revenues. However, in case of BlackBerry, its revenues have been on a slide for the last few years. As a result, we have seen a valuation de-rating in BB stock. It is currently trading four times its sales.
Declining financial growth
The Cybersecurity segment is expected to see revenues of US$88 million in fiscal Q4 2023. Cybersecurity is BlackBerry’s mainstay and contributes nearly two-thirds of its consolidated revenues. It was this cybersecurity business that BlackBerry shifted to when it closed the smartphone-making business a decade back.
However, it is quite worrying for its investors to see the core business struggling. The competition in the cybersecurity market has been eating up its market share. Apart from falling revenues, its margin deterioration is also a troubling aspect for BlackBerry and its investors. Its gross profit margin has dropped by 13 percentage points since peaking in 2019.
The Internet of Things (IoT) will likely be the growth driver for the company in the long term. BlackBerry QNX, an operating system for cars, has already been embedded in almost 215 million cars globally. The segment is expected to report revenues of US$53 million in fiscal Q4 2023. IoT could change BlackBerry’s course in the long term with its technical expertise and scale. However, it could still be far in the future.
BlackBerry has a sound balance sheet with little debt and decent liquidity. So, it could use leverage to fund growth, probably after macroeconomic woes somewhat ease.
Upcoming rate hikes and higher inflation might continue to dent its performance further. An impending recession could cut back corporate spending on cybersecurity, while a slowdown in the automobile market will likely weigh on its IoT segment. So, the trend of declining top line might continue for some more quarters.
BB stock fell to $4.3 levels late last year. It seems like an arduous target to breach double-digit levels this year, considering its fundamental weakness. If the macroeconomic picture deteriorates further, we might see BB stock revisiting last year’s lows again.