The r/WallStreetBets crowd picked some strange targets when it roiled the markets in January. Few are stranger than BlackBerry (NYSE:BB) stock.
Certainly, the choice of BB isn’t quite as odd as a micro-cap headphone manufacturer or a third-tier cannabis stock. But I’d ask any investor buying BB stock based on Reddit optimism or hopes for a “squeeze” a simple question: What, exactly, is the bull case for the stock?
There is an answer to that question, certainly. For every stock that isn’t a fraudulent pump-and-dump (which BB obviously isn’t), there’s an answer to that question.
The problem for BB stock is that there doesn’t seem to be a particularly good answer.
BlackBerry exited its phone business back in 2016, after quickly ceding its former market dominance to rivals. And since then the company has tried to become a software, instead of a hardware, company.
The Spark business focuses on cybersecurity, resting on the expertise BlackBerry developed with its phones. Blackberries were the common choice of government officials, for instance, due to their security advantages. The company has tried to leverage this experience by rolling out a government-focused unit that operates separately from the parent company. Recent updates have added artificial intelligence to the mix.
The IoT Solutions segment centers on security for the Internet of Things. BlackBerry is targeting automotive end markets with particular intensity. Its capabilities here are backed by QNX, acquired all the way back in 2010.
BlackBerry has had some success in that vertical, and is looking for more. A partnership with a major “cloud” provider will back BlackBerry IVY, an AI-driven platform for automotive companies.
So this is the bull case for BlackBerry: that its pivot into software will drive growth over time. I’m skeptical that too many Redditors are intimately familiar with the details of that bull case because it has a pair of big problems.
A Lack of Growth
Perhaps the most obvious problem is that the bull case for BB stock has been around for a while. The pivot to software isn’t a new strategy; it was announced before the phone business was sold. It goes back to the appointment of current chief executive officer John Chen, after a planned sale of the company (at $9 per share) fell through.
Chen took over in November 2013. Since then, BB stock has gained 37% — total. Essentially all of the gains have come this year, largely due to Reddit-driven optimism.
The problem has been that BlackBerry simply hasn’t posted much growth. What the company calls “adjusted software and services revenue,” which adds back deferred revenue, was $782 million in FY2018 (ending February).
Four years later, based on guidance for billings (which is the same thing; BlackBerry has adjusted its presentation owing to regulatory guidance), the figure almost certainly will be lower.
Using adjusted earnings figures, the same problem holds. BlackBerry earned 14 cents per share in FY2018, and 18 cents in FY2021. But those profits were due to high-margin revenues generated by licensing the company’s patent portfolio. BlackBerry is in discussions to sell much of that portfolio, and Wall Street expects adjusted losses in FY2022 as a result.
The story sounds good, certainly, with BB stock apparently a play on IoT and the growing amount of data created by consumer vehicles. But that story hasn’t been enough to improve BlackBerry’s finances or to do much of anything for BB stock.
‘This Time Is Different’ for BB Stock
The fact that BlackBerry hasn’t succeeded so far doesn’t mean it won’t succeed going forward. Again, there is a bull case here.
But there’s a roadblock here, too. It’s one that becomes relatively obvious when looking around the cybersecurity industry.
The fact that BlackBerry has this long history in the industry isn’t a plus. It’s a minus.
That seems counterintuitive. Experience is usually thought of as a good thing — in any field. But in cybersecurity, it has been different.
The companies that have been most successful at driving growth — and not coincidentally, driving higher investor returns — have been newer firms. They’ve almost without exception built what are known as “cloud-native” platforms.
In other words, they didn’t start with hardware or on-premise and try to pivot to a SaaS (software-as-a-service) offering. They built everything from scratch to be a cloud offering.
These newer, younger firms are nimbler and seem to offer better products. They’re not dragged down by old code or old perceptions or the need to educate consumers on what has changed.
BlackBerry has those problems. Its perception isn’t great. Even with the smartphone business a distant memory, the company hardly has a reputation as a nimble, innovative, cybersecurity leader. Instead, it’s a laggard trying to play catch-up.
In recent years, those efforts have rarely worked anywhere in tech. In cybersecurity, the success rate seems even lower. A bet on BB stock is a bet that BlackBerry will be the exception to the rule — and I don’t see near enough reason to take that bet.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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