BlackBerry Is Seeking Growth From Cybersecurity and Connected Vehicles but Hasn’t Earned a Moat

Business Strategy & Outlook

BlackBerry has positioned itself in rapidly growing markets that benefit from secular trends toward security and connectivity, but it has a long way to go to earn a durable competitive advantage. BlackBerry sells software into enterprise cybersecurity applications and embedded applications like cars. Its flagship enterprise product is the Spark suite, which combines unified endpoint management with endpoint protection. In the automotive market, BlackBerry’s QNX software powers infotainment systems, where it leads the market, as well as electronic control units and advanced driver-assistance systems. BlackBerry performs best in regulated industries such as government, financial services, and healthcare, where security and privacy are more mission-critical. CEO John Chen has helped turn the business around after its handset decline, primarily via software acquisitions like Good Technology and Cylance. The metrics of BlackBerry’s success going forward will be an ability to gain market share against larger incumbents and improve profitability. The core of its technology–both in cybersecurity and automotive software–is strong, but the company’s lackluster ability to use this technology has been disappointing in relation to maintaining solid growth or gaining market share. BlackBerry does not merit an economic moat.

BlackBerry is expected to focus on its go-to-market approach for its enterprise offerings in order to gain market share. While BlackBerry is well recognized in regulated industries, it will have to improve its ability to sell into a broader base of enterprises to grow. After a slew of acquisitions during Chen’s pivot, BlackBerry is now anticipated to focus on organic investment in operating expenses to spur growth. The firm’s greatest growth opportunities will come from connected and autonomous vehicles. BlackBerry’s QNX software is anticipated to benefit in the short and medium term from increasing levels of autonomy worldwide, and think its partnership with Amazon for its IVY platform gives it a longer-term growth opportunity in connected and autonomous cars.

Financial Strengths

BlackBerry is expected to focus on improving its profitability and free cash flow over the medium term. As of Feb. 28, 2022, the firm carried $507 million in debt compared with $712 million in cash and equivalents. While the firm is not projected to be GAAP profitable for a few years, management’s goal is to be non-GAAP profitable while generating positive free cash flow, which it failed to do in fiscal 2022. The company is forecasted to steadily improve while it works to regain positive free cash flow and GAAP profitability. The current forecast shows that there is enough cash flow generation to enable the firm to fulfill its obligations over the next few years. BlackBerry does not pay a dividend, nor does it regularly conduct share repurchases as a way of providing capital back to shareholders. Management has been focused on the business turnaround from handsets and has prioritized using excess cash for inorganic growth opportunities and divesting from its hardware business. While the firm has paused M&A for now to focus on its go-to-market strategy, a cash buildup is anticipated over the explicit forecast that could allow for future acquisitions.

Bulls Say

The Spark suite provides the widest breadth of endpoint capabilities BlackBerry has offered to date, and should appeal to enterprises looking to consolidate their software vendor lists.

BlackBerry’s focus on security gives it an advantage in regulated industries, like government, healthcare, and financial services.

BlackBerry IVY—the result of a partnership with Amazon Web Services—could create a revolutionary software ecosystem for connected vehicles, allowing OEMs to process, analyze, and monetize massive amounts of vehicle data.

Company Description

BlackBerry, once known for being the world’s largest smartphone manufacturer, is now exclusively a software provider with a stated goal of end-to-end secure communication for enterprises. The firm provides endpoint management and protection to enterprises, specializing in regulated industries like government, as well as embedded software to the automotive, medical, and industrial markets.

(Source: Morningstar)

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