BlackBerry (TSX:BB) stock is trading near its 20-year low. If you own this stock, you might see your investment in deep red. This constant downtrend has made many investors apprehensive. Despite these declines, Wall Street analysts have a hold rating on the stock, and some have a buy rating. Is BlackBerry a stock you should keep adding at the dip, or is it a hole that you should stop digging?
Is BlackBerry stock a value buy or a value trap?
To find an answer to the dip, I looked beyond the company’s fundamentals and into its shareholding. BlackBerry’s management’s compensation is tied to the share performance. On January 8, many officers of BlackBerry sold their shares, and the stock crashed 18% on January 23. Behind the dip was the convertible debenture maturing on February 15. There was fear that Fairfax Holdings, BlackBerry’s largest shareholder (7.93%), would exercise the option to convert the debenture into shares and increase its stake.
However, BlackBerry paid off the old debenture and issued a new one to Fairfax Holdings, easing shareholders’ concerns. Institutional investors, including mutual funds like Vanguard and Mirae, are major shareholders in BlackBerry. The interest of these wealth managers in BlackBerry shows that the company is well-researched and has something valuable, which is keeping these investment companies hooked.
Prediction: Three things that could send BlackBerry stock up
On the valuation front, BlackBerry stock is trading at 1.98 times its sales per share. As the company’s revenues have been declining for several years, the stock may seem overvalued. However, the company is now reversing this trend. It may likely report revenue growth in 2024, driven by the unlocking of QNX royalty revenue and new order wins in the cybersecurity division.
An uptick in IoT revenue
Since 2021, BlackBerry has been facing headwinds. While its QNX operating software secured several design wins from 24 of the top 25 electric vehicle makers, car sales took a hit. First came the semiconductor supply shortage that saw several unfinished cars in the inventory. As the supply shortage eased, the rising interest rates affected consumer spending and pushed the demand further into the future.
In the third quarter, BlackBerry’s Internet of Things (IoT) revenue surged 12.2% compared to the second quarter, driven by royalties. At that time, it guided a 12.7% sequential growth in revenue in the fourth quarter. I expect BlackBerry’s stock to ride the recovery in car production that will unlock the $640 million QNX royalty backlog. Royalty revenue is a high-margin business and could significantly boost its profits.
The secular trend of IoT proliferation
It is not just the pent-up demand but also the secular trend of IoT devices that a 5G ecosystem will facilitate. The 5G will connect millions of devices to the cloud and help them perform AI (artificial intelligence) tasks. This connected world needs secure transmission and analysis of data. Frost & Sullivan recognized BlackBerry as a “preferred vendor for embedded connected and autonomous vehicle solutions.”
BlackBerry has a competitive product portfolio in a fast-growing market. The only problem is the execution, which is keeping the company from unleashing its true potential.
Focus on profitability and positive cash flow
BlackBerry is tackling the elephant in the room through restructuring. The new chief executive officer went back to the drawing board and chartered a structure where cybersecurity and IoT will operate as standalone businesses under different business leaders but one umbrella: BlackBerry. It is streamlining its selling, marketing, research, and development (R&D) efforts as part of the restructuring.
In the upcoming fourth-quarter earnings on April 3, we will see how the restructuring is being executed. BlackBerry’s primary focus is to stop cash burn and become cash positive by March 2025. If it succeeds, BlackBerry stock could rally to its normal trading price of $8 and above.
Investing in BlackBerry stock
BlackBerry stock is trading below $4. If you own the stock, you could buy more and reduce your average cost per share. If you don’t own this stock, it is a good time to buy and hold it for the long term. The long-due turnaround could kick in a year or two and send the stock soaring 200-300%. Most investment companies are holding BlackBerry stock for the long term.
