Macquarie analyst Gus Papageorgiou recently predicted that BlackBerry Ltd (NADSAQ:BBRY) stock could reach $45 by 2020. However, the analyst may have underestimated the potential of BBRY stock. My analysis, which is partly based on assumptions derived from Papageorgiou’s note, indicates that BlackBerry stock can reach $65 by fiscal 2020.
This Financial Post article suggests that Papageorgiou based his 2020 EPS estimate of $1.82 for BBRY primarily on incremental revenue that he believes the company can obtain from its QNX auto operating system and its RADAR truck tracing device. The analyst, however, seems to have left out a crucial potential revenue and profit driver for BlackBerry: cybersecurity.
As I pointed out in my April 3 column about BlackBerry, the company is working closely with Giuliani Partners, whose CEO, Rudy Giuliani, was tapped to advise the administration on cybersecurity. Moreover, as I also noted, BBRY CEO John Chen said that certifications the company had received would enable it to sell security to “a lot of other governments.”
And of course, the recent WannaCry attack has made many enterprises, including governments, significantly more worried about cybersecurity.
Assuming that Papageorgiou did not include a significant amount of incremental cybersecurity revenue in his model, it would not be unreasonable to add another $300 million in revenue to his 2020 estimates (The U.S. government alone spent $14 billion on cybersecurity in fiscal 2016, so an additional $300 million for BlackBerry from the U.S. and other governments by 2020 doesn’t seem unreasonable.)
If we assume that the revenue carries the same 60% gross profit margin that BBRY reported last quarter, about $180 million of the $300 million will flow to the company’s bottom line. And based on its share count of 531.48 million as identified by Google Finance, the incremental cybersecurity revenue will increase its earnings per share by about 34 cents.
After adding the 34 cents per share to Papageorgiou’s fiscal 2020 EPS estimate of $1.82, we get total EPS of $2.16. If a 30X multiple is applied (that’s just a little above Check Point Software Technologies Ltd’s (NASDAQ:CHKP) current multiple of about 26 and way below the multiples of many other cybersecurity names), BlackBerry stock would be worth around $65 by fiscal 2020, nearly six times above today’s share price.
Doubts About QNX
Of course, Papageorgiou’s estimates assume that QNX will retain a commanding market share in automobiles. Recently, that assumption has been questioned by a number of pundits who have noted that Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) has launched its own auto operating system, Android Auto. But Forbes points out that QNX has three advantages over Android Auto: it’s a known quantity, it’s already been used to power autonomous mobile devices such as robots, and it’s much more secure.
“Android is perpetually in beta, whereas QNX actually works,” Strategy Analytics analyst Roger Lanctot was quoted by the article as saying.
To be fair, the article was published in November 2015, so it’s entirely possible that many of the kinks in Android Auto have been worked out by now. But security is a much bigger issue to fix, and there are still signs that the platform’s security remains subpar.
Since hacking of automobiles could theoretically lead to fatalities in the age of autonomous driving, security of cars’ operating systems is a pretty big deal. Maybe that’s one reason Ford Motor Company (NYSE:F) chose to partner with QNX instead of Google.
And that is why Papageorgiou’s belief that BBRY could charge $7.50 per user per month for its automobile security service sounds pretty realistic. After all, $7.50 per month isn’t much to pay when your life could literally be at stake.
BBRY stock could reach $65 by 2020 based mainly on the growth of its Radar, QNX, and IT security businesses alone. And that probably doesn’t give the company much if any credit for its licensed hardware business, its BBM deal with Indonesia’s Emtek, increased revenue from its patents, any acquisitions it will make with the cash it obtained from Qualcomm, Inc. (NASDAQ:QCOM), and share buybacks. With its many strong potential positive catalysts, BBRY stock could easily generate very impressive.returns over the couple of years.
As of this writing, Larry Ramer owned shares of BBRY stock.
