BlackBerry (TSX:BB) is a name that has seen severe ups and downs in the last 20 years, and today it is at its lowest. The stock has even fallen below the epic 2007 fall when Apple’s iPhone disrupted BlackBerry’s button phone market. But this time, things are different. Behind BlackBerry’s 50% fall since September 2023 to $3.66 is the growing interest of Fairfax Holdings’s Prem Watsa.
BlackBerry is an investment with a long lead time. The long lead time is close to fruition, as profitability is on the cards in the next four to five years.
Understanding BlackBerry’s profit potential
BlackBerry has $640 million worth of QNX royalty revenue backlog waiting to be unleashed. The company earns revenue from QNX operating system at the design win phase and a royalty per vehicle at the production phase. The royalty backlog kept piling up as vehicle sales have been low since the pandemic.
BlackBerry shareholder Dorsey R. Gardner, in a letter, stated, “In the next several years, BlackBerry will receive a waterfall of very high margin royalties from prior placements of QNX software with virtually all of the major OEM auto companies—placements which have occurred over the last four or five years.”
Apart from QNX, it has IVY software. Moreover, its Cybersecurity business that could see a gross margin expansion of 4-6% by 2026. BlackBerry’s cybersecurity business caters to government organizations. The growing involvement of artificial intelligence (AI) in mission-critical applications and the proliferation of the Internet of Things (IoT) will make endpoint security a necessity. BlackBerry, with its unique blend of endpoint security and QNX, is well-placed to tap the upcoming trend of cybersecurity and IoT and generate wealth for shareholders in the long term.
Why is BlackBerry stock trading at its 20-year low?
While BlackBerry’s growth catalyst is intact, the stock fell to its 20-year low. Behind the fall was a series of events that shook investor confidence.
- First was the announcement of spinning off its IoT business in October 2023.
- Second was the reversal of the spinoff in December 2023 with the appointment of new chief executive officer (CEO) John Gamatteo. The new CEO has yet to show results that could create value for shareholders.
- The latest trigger was in January when the company issued a 3% convertible debenture to raise $175 million to repay its 1.75% convertible debenture maturing in February 2024.
Investors reacted aggressively to the debenture news because of a shareholder letter dated June 2023. Dorsey R. Gardner was worried Fairfax would increase its stake in BlackBerry to 16% through its US$150 million, 1.7% convertible debenture at US$6 per share. But Fairfax extended the maturity to February 2024. Hence, the issuance of new debentures worth US$175 million garnered a lot of interest.
What to expect from this stock
The long-term shareholders’ optimism around BlackBerry comes as the company undergoes a restructuring under the leadership of John Gamatteo. The company will not spin off its two businesses. But it will operate them as standalone businesses with a thin corporate layer. As part of the restructuring, the cybersecurity business will cut costs by laying off 200 positions and reducing the number of facilities.
BlackBerry aims to achieve $55 million in annual savings and another $100 million in net profit improvements through operating efficiency. If the restructuring goes as planned, BlackBerry could report positive cash flow in the March 2025 quarter. The restructuring, the royalty backlog and prolonged delays in cybersecurity contracts could keep BlackBerry’s stock price under pressure in the short term.
But once the company turns profitable, it could bring significant returns to shareholders who buy and hold. A stock price of $15-$20 is likely achievable if the company taps the potential. You could consider investing $10,000 in the stock today while it trades below $4 and forget about it for another 10-12 years. This investment could probably be a millionaire maker. But only invest the amount you are willing to lose.
