BlackBerry. Microsoft Windows. See any similarities? No?
BlackBerry’s (BlackBerry Stock Quote, Chart, News TSX:BB) QNX platform could become the Microsoft Windows of the connected, autonomous car, says PI Financial analyst Gus Papageorgiou, who on Wednesday initiated coverage of the stock with a “Neutral” rating and target price of C$7.60.
Erstwhile phone-maker BlackBerry has done a good job at transitioning from hardware to software, according to Papageorgiou, who points to the company’s gross margins which are now higher than ever with the sought-after recurring revenue streams. And while revenue from its enterprise software business continue to be challenged, the analyst thinks this has been due to a number of things, including, a change in sales strategy, new accounting rules as well as increased competition from Microsoft.
But BlackBerry’s path forward seems to lie in QNX, says Papageorgiou.
“The main reason to consider BlackBerry is its QNX embedded software solution. QNX could become the Microsoft Windows of the connected/autonomous car. BlackBerry is already in 120 million automobiles globally and has relationships with almost all the Tier 1 suppliers and the OEMs. We believe BlackBerry’s ASP for QNX could go from the ~US$4 range to the US$20+ range, and its penetration of the market from ~20 per cent to much higher,” writes Papageorgiou in a coverage launch on Wednesday.
And while Papageorgiou thinks that BlackBerry has the assets to put together a compelling Internet of Things solution, especially for the automobile industry, the work will take time. As well, the analyst has words to say to BB’s execution up to this point in its multi-year transformation, saying,
“The Company has failed to capitalize on some promising solutions and is undergoing a disruption in its enterprise sales channel. Management needs to be credited for transitioning business but must focus on better execution,” writes Papageorgiou.
BlackBerry’s share price has been on a longer downward trend since early 2018. While the stock showed good life to start off 2019, rising 30 per cent over the first three months, it has been taking it on the chin ever since. The latest hit came with the company’s second quarter financials delivered on September 24, where a consensus miss and lowered guidance seemingly caused the market to turn sour on BB.
BlackBerry reported break-even earnings for its Q3 and non-GAAP adjusted revenue of $261 million, whereas analysts were expecting negative $0.01 per share and $266 million. Management also called for full fiscal year 2020 revenue growth of 23 to 25 per cent, narrowed from the previous guidance range of 23 to 27 per cent. (All figures in US dollars except where noted otherwise.)
Papageorgiou thinks BlackBerry will generate fiscal 2020 revenue and EBITDA of $1.110 billion and $102 million, respectively, and fiscal 2021 revenue and EBITDA of $1.191 billion and $152 million, respectively.
The analyst is valuing BB based on a 2.5x multiple of his 12-month EV/Sales one year out estimate, while noting that valuing BlackBerry is “challenging” since the company has been completely transformed over the last few years.
Papageorgiou’s C$7.60 target represented a projected 12-month return of 15.5 per cent at the time of publication.
File under: BlackBerry Microsoft, BlackBerry Microsoft Windows