Despite The Recent Rally, BlackBerry May Be Worth More If It Were Acquired

BlackBerry (NASDAQ:BBRY) stock has rallied by about 60% year-to-date, trading at around $11 currently. Much of the increase was driven by the company’s recent $940 million arbitration award (including interest and attorneys’ fees) from Qualcomm as well as some optimism surrounding the its mobile security software platform. CEO John Chen has also succeeded in giving the company a sense of direction by focusing on the software front, while exiting the struggling hardware business. That said, despite the recent rally, BlackBerry faces a fair bit of uncertainty. The firm has yet to return to profitability, and revenue growth is also likely to remain elusive in the near-term. In this note, we spell out some reasons why BlackBerry could  have significantly more valuation upside if it were to be acquired – either as a whole or in parts.

See our complete analysis for BlackBerry here

We have a $10 price estimate for BlackBerry, which is slightly below the current market price.

Driving Meaningful Revenue Growth Remains Challenging 

BlackBerry’s near-term operational outlook remains mixed. The company’s revenue decline is expected to continue into this year as well (we project around a 35% drop), while remaining almost flat next year, as declines from the once lucrative service access fee business and smartphone unit more than offset growth on the core software front. The company’s profitability also remains uncertain, with analysts predicting barely break-even profits over the next two fiscal years. BlackBerry also faces challenges in driving growth over the longer term. Take, for instance, the two biggest products in BlackBerry’s software portfolio – the BES enterprise mobility management (EMM) solution and the QNX software. While the EMM businesses is becoming a source of revenue stability for the firm, the EMM market as a whole is very small, standing at just about $1.76 billion in CY2016. For perspective, that is less than BlackBerry’s fiscal 2016 revenues. Competition is also intense, and the industry is highly fragmented with multiple small players, limiting the long-term growth potential.

The QNX embedded operating system, which BlackBerry primarily licences to automotive vendors to power infotainment systems, may also be ripe for disruption. The software runs behind the scenes, with many car companies and other OEMs building out relatively underwhelming UIs and limited app-based functionality. Silicon valley titans Apple (NASDAQ:AAPL) and Alphabet (NADDAQ:GOOG), Google’s parent company, have been increasingly interested in this space and there is a possibility that they could upend the market, given their large base of smartphone users and third-party developers (related: BlackBerry’s QNX Faces Significant Threats In The Auto Market). BlackBerry also has bets in several other fledgling or highly competitive areas (self-driving cars, fleet tracking), but meaningful monetization may still be a long way off.

BlackBerry’s Assets Could Be More Valuable To Larger Corporations

To an extent, the investment thesis for BlackBerry has been driven by hope and potential rather than its concrete performance, and it’s possible that shareholders may prefer to trade off a somewhat uncertain long-term upside from EPS growth for a sizable (and certain) premium over the current market price that could come with an acquisition. BlackBerry’s current enterprise value stands at just about $4 billion, making it an accessible target for most large technology firms, which have seen their valuations soar in recent quarters. BlackBerry is no longer in financial distress, and it should have significant leverage while negotiating with a potential suitor.

Moreover, the company’s tech portfolio is geared towards currently hot trends – such as secure communications and the Internet of Things – that could be much more valuable to a larger corporation that has the platforms and resources to deploy these technologies at scale, compared to BlackBerry. BlackBerry has a portfolio of about 44,000 patents, which include technologies relating to security and basic wireless communications. Many of the company’s patents relate to foundation technologies in the mobile communication space, where lawsuits over basic technologies have been abundant. For instance, China’s fast-growing mobile vendors – who have increasing global ambitions and weak intellectual property – could find this appealing. BlackBerry’s QNX software, as well as its secure communications technologies, could also be valuable to tech conglomerates such as Samsung, who are looking to make a dent in the IOT space.

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