BlackBerry‘s (NASDAQ:BBRY) stock has declined by close to 10% over the last three months, after remaining largely range-bound between $7 and $8 per share throughout 2016. While the firm has been taking steps to turn around its business over the last four years, since its smartphone business started to decline in 2012, we have yet to see the efforts translate into earnings growth, and investors don’t seem to have bought in to the company’s plans. Moreover, there is a sense that BlackBerry could be biting off more than it can chew, as the firm now runs or intends to enter businesses ranging from security software and instant messaging to fleet tracking and autonomous driving technologies. Below we take a look at some of the key risk areas for BlackBerry’s stock.
We remain neutral on BlackBerry stock, with a price estimate of about $8 per share.
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- BlackBerry Q3 Preview: Smartphone Licensing, New Businesses In Focus
- What BlackBerry Aims To Achieve With Its Latest Security Offering
- Why BlackBerry’s Software Deal With Ford Is Promising
- BlackBerry Does The Right Thing By Pulling The Plug On Handset Development
Exiting The Handset Business Will Hurt BlackBerry’s Revenue Base Further
BlackBerry exited the hardware business after its Android handsets failed to gain traction, and the company has now chosen to license its brand and smartphone software to other vendors who will manufacture and market BlackBerry-branded smartphones. While the firm has estimated gross margins of roughly 90% for its licensed products, there is a possibility that many of the costs associated with the handset business will now be shifted to the research and development side. Revenues from licensing deals are likely to be relatively limited, which could prove to be an issue as the hardware business was a significant contributor to the company’s overall revenue mix. This means that BlackBerry’s revenues are likely to continue their descent throughout this year as well, and we now forecast that the firm will not return to revenue growth until 2019.
EMM Risks And Lack Of Transparency In Software Reporting
BlackBerry is the market leader in the enterprise mobility management space, and its BES 12 product (recently renamed BlackBerry UEM) is becoming a source of relative stability for the firm, as it has shifted to a subscription-based revenue model. While the EMM market is growing, driven by electronic security concerns and an increasing shift from PCs to mobile devices, there are challenges. Firstly, the market is still relatively small, standing at roughly $1.76 billion in 2016. For perspective, that’s less than BlackBerry’s fiscal 2016 revenues. Secondly, competition is intense and the industry is highly fragmented with multiple small players. Moreover, BlackBerry has not been forthcoming with any hard numbers for the BES business (total users, ARPU, churn, etc.). This lack of transparency for the software business – which the company has highlighted as the key driver of its turnaround – is likely a factor weighing on Blackberry’s valuation.
Markets Not Recognizing Security Potential
BlackBerry has been touting its strengths in the security space since it began its turnaround, and recently moved to repackage its various enterprise security offerings into a single product line called BlackBerry Secure. Security software products are becoming more important to organizations, given the increasing concerns of electronic eavesdropping and data theft. However, investors haven’t been very enthusiastic about the security software market in general, likely due to the low revenue growth rates (Gartner estimated that the market grew by just 3.7% in 2015). For instance, security software provider FireEye has seen its stock trend lower in recent quarters, while security behemoth Symantec’s stock was largely listless until it acquired Blue Coat in mid-2016.
QNX And Automotive Bets May Never Make It Big
BlackBerry’s QNX software, which is a versatile piece of embedded systems software, has provided BlackBerry with significant exposure to the automotive market, where it is used to run infotainment systems. As the monetization potential of the product in infotainment systems is relatively low (as little as $3 per license, per IHS), BlackBerry has been looking to expand the product’s reach into other industries such as the Internet of Things, fleet tracking and self-driving cars. However, we believe these projects may have difficulty scaling up, as the firm competes with much larger and more well-entrenched players. For instance, the fleet tracking/management market has seen consolidation, with Verizon buying market leader Fleetmatics last year. Moreover, BlackBerry’s self-driving car ambitions could fail to take off as well, with behemoths Google and Intel investing significantly in projects of their own. QNX’s future as an embedded player also faces challenges amid competition from open-source software such as Linux, which many customers find more flexible and economical.
The Bottom Line
BlackBerry finds itself at a crossroads of sorts, with significant volatility in its business, and will need to achieve significant levels of growth going forward in order to satisfy investors. From that perspective, these ambitious initiatives make strategic sense. However, there is a risk that BlackBerry may be spreading itself too thin, with multiple initiatives – many of which are in fledgling or highly competitive areas.