Shares of BlackBerry (NYSE:BB) came roaring back from the grave this week after the company announced it had reached a court settlement with Facebook (NASDAQ:FB). With shares up 25% on the news, BlackBerry stock is finally showing signs of life again.
For years, investors have watched in dismay as BlackBerry’s handset empire disintegrated. Despite the best efforts of turnaround CEO John Chen, the company’s move to software and services has seen its share of roadblocks. In Q3, the company reported that revenues had sunk another 10%.
Tuesday’s win, however, could mark a turning point in BlackBerry’s fortunes. Though its future is still far from certain, BlackBerry now has the one silver bullet all tech companies crave: momentum. With its newfound energy, the firm can raise cheaper capital, hire more talent, and build itself into the IoT cybersecurity firm investors have long dreamed of. With some luck, here’s why investors might see shares rise another 100%.
BB Stock: Ready for a Turnaround
Today’s BlackBerry would look almost unrecognizable to its former self. Gone are the days where the Secret Service had to pry one of its phones from the U.S. president’s hands. Today, Blackberry is a far smaller company trying to stop itself from becoming an even smaller one. Sales are a tiny fraction of the $20 billion earned at its peak in 2011. And its once-ubiquitous handset brand is now owned by a small Texas tech company named Onward Mobility.
Yet, Blackberry has quietly remade itself as a top player in end-to-end cybersecurity — the digital tools that protect devices from getting hijacked. Today, the company secures more than 500 million endpoints, including 175 million cars.
Its flagship IoT solution, the QNX operating system, runs everything from driver assistance to infotainment systems for eight of the top-ten auto manufacturers. And its core software and services product, the BlackBerry Spark, beat blue-chip competitors VMWare (NYSE:VMW), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) to earn Gartner’s top spot for Unmanaged/BYO Use Cases.
In other words, Mr. Chen and his team have made Blackberry a leader in cybersecurity for mobile applications. And no one noticed.
Financially, however, things haven’t been so rosy. Without its lucrative handset business, BlackBerry has seen revenues plummet over 95% from its 2011 peak. Its stock also suffered, dropping from a high of $145 down to the $6-10 range, where it has remained since 2012. That makes the company’s recent move to $13 so intriguing.
Small Wins, Big Gains
All growth investors will proudly say they look for three factors in an investment: a strong balance sheet, a great product (or founding team), and a growing market. Privately, however, these same investors will agree on an even more critical factor: strong momentum.
That’s because when it comes to tech investing, momentum matters more than outsiders think. In a world where top engineers can expect ten times their salary on stock options, a rising share price is a recruiter’s best friend. (These days, affordable healthcare plans might come in No. 2).
It’s why even VC-funded tech startups care so much about their valuations – even if employees can’t sell their stock options, seeing zeros get added to their net worth keeps many from jumping ship.
A rising share price also helps with funding, a significant thorn in BlackBerry’s side since its “good old days.” Before its recent run-up, they needed to refinance its 2016 debentures with a substantial $365 million convertible debt issuance. It’s one of the most expensive forms of financing reserved for companies without better options. And unless BlackBerry has since modified terms or redeemed debts, the company would have now lost $425 million on them.
With its market capitalization now up almost 100% since Jan. 1, the company now can right some of these wrongs. And that’s far more valuable than any settlement it might have received from Facebook.
Is BB Stock the Next Nokia?
Even the most bullish tech investors might give pause. Three weeks of share gains don’t make a trend. So, what makes BlackBerry’s recent rise any different from its 2017 run-up and subsequent collapse?
This time, the company has solid financials on its side. In the past 12 months, the company earned $127 million EBITDA, reversing years of declining profitability. A combination of an enterprise sales force reorganization, successful product launches, and cost controls have finally stabilized the cash flow of this once-wobbly company. And though the coronavirus pandemic has impacted auto sales, 2021 is shaping to become a rebound year.
Investors often approach so-called “turnaround tech” with skepticism. For every success like Apple (NASDAQ:AAPL) in the late-90’s, ten more wind up in bankruptcy court. But having finally found itself on the right side of history, Blackberry could be the next breakout in cybersecurity tech.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
