BlackBerry (TSX:BB) stock jumped almost 18% last week after its first-quarter earnings showed better performance in cybersecurity revenue. The earnings hinted that the company is gradually realizing pending revenue deals delayed in 2022 amid economic uncertainty. The second half of 2023 looks promising for the company as its long-term secular growth trends unfold.
But is the 18% jump overblown? Is now a good time to invest in BlackBerry?
How BlackBerry earns money?
BlackBerry has three income streams:
- The primary stream is the cybersecurity business (64% revenue), wherein it sells endpoint security solutions to governments and is gradually expanding it to include companies. Almost 85-90% of revenue is product revenue, and the remaining is professional services.
- The second stream is the Internet of Things (IoT) business (31% revenue), wherein it has two software products, QNX and the latest IVY. IVY is yet to generate revenue. The company gets royalty income as more companies adopt QNX in their automotive, healthcare, and other IoT devices. The revenue comes during the design phase and then on production as a royalty.
- The third stream is the licensing business (5% revenue), wherein it sells its intellectual property to a company and earns revenue on sales.
What did BlackBerry’s earnings reveal?
Since 2022, BlackBerry has been facing elongated sales cycles as governments delayed IT spending due to economic uncertainty. While the cybersecurity segment’s first-quarter revenue was low, it surged 6% sequentially, realizing its first sequential revenue growth in five quarters.
The earnings highlight was a 37% year-over-year jump in total contract value billings of $122 million. It hints that BlackBerry finally closed a major deal. The company has two more deals in progress and two major deals entering the pipeline.
BlackBerry’s secular growth trends
BlackBerry is a preferred cybersecurity solutions provider for several government offices. The number of cyberattacks worldwide is rising, with average weekly attacks up 7% to 1,248 attacks in the first quarter. The volume has created security staff fatigue as companies have staff shortages to prevent these cyberattacks and malware. Moreover, the generative artificial intelligence (AI) trend and IoT proliferation from the 5G rollout has created an emergence of cybersecurity that no AI can infiltrate.
This emergence could expedite BlackBerry’s long pending cybersecurity deals and help it win new ones. The company expects its cybersecurity revenue to increase at a compounded annual growth rate (CAGR) of 12% by fiscal 2026.
BlackBerry is also a beneficiary of the electric vehicles (EV) trend. It has design wins from 24 of the top 25 EV original equipment manufacturers (OEMs). EV production has been stalled first by a semiconductor supply shortage and now by a weak macro environment. This has piled up $640 million of QNX royalty revenue, which the company will realize once automotive production gathers momentum. In the meantime, BlackBerry continues to secure QNX design wins.
BlackBerry is also looking to tap the next big opportunity of convergence in cybersecurity with its IVY platform. It will converge the IoT value chain – telcos, semiconductor companies, cloud providers, big data companies, and IoT providers – to create a secure hyper-connected IoT system. Convergence could grow the IoT opportunity fivefold for BlackBerry.
These secular trends show that BlackBerry has long-term growth prospects if it can successfully tap these opportunities.
Is an 18% stock price jump overblown?
Within a week, BlackBerry stock went from close to oversold to close to overbought and is now trading at its pre-pandemic average price of $7.41. An 18% jump is not overblown but a recovery rally. It still has upside left as the stock could surge to $11.50-$12 in a bull market, representing a 60% upside from the current trading price.
While BlackBerry stock has an upside, I wouldn’t buy the stock above the $6 price. If you already own the stock, continue holding and consider selling some shares when the stock crosses the $11.50 price. If you don’t own the stock, wait for the bulls to ease, buy at the dip and hold it for the long term.
