BlackBerry’s stock is undervalued, says Morningstar

Is BlackBerry (BlackBerry Stock Quote, Chart, News, Analysts, Financials NYSE:BB) undervalued?

After reviewing the company post Q2 results, Morningstar says yes.

In a research report on October 27, 2023 analyst William Kerwin said the “Fair value estimate” for BlackBerry’s stock was $6.60.

Shares of BlackBerry on the NYSE closed October 27 at $3.41, meaning the research firm thinks the stock is a near double from here.

But the assessment came with a caveat.

“The Blackberry stock is fundamentally undervalued, but has no immediate catalysts to push it up,” the analyst argued.

On September 28, the company reported its Q2, 2024 results. BlackBerry lost $47-million on revenue of $132-million, down 21 per cent from the $168-million it posted in the same period a year prior.

“Our IoT business continues to win new designs and add royalty backlog at a strong rate, illustrating how well-positioned this business is in the medium to long term,” CEO John Chen said. “We expect a strong finish for IoT revenue this fiscal year, with the fourth quarter forecasted to be the strongest ever. Further, we are excited by the response from beta customers to our next generation QNX® Software Development Platform 8.0, and its potential to enable embedded Generative AI applications. We also expect a strong second half for revenue in our Cyber business, with a pipeline of deals that include large, mainly perpetual government opportunities that can deliver meaningful in-year revenue. Therefore, we are reiterating our full-year Cyber revenue outlook.”

The analyst gave a more detailed assessment of BB’s current situation.

“With its 4-star rating, we believe BlackBerry’s stock is undervalued compared to our long-term fair value estimate. Our valuation implies a fiscal 2024 enterprise value/ sales ratio of 4 times and a USD to CAD conversion rate of 1.35, as of March 30, 2023,” he said. “We forecast compound annual revenue growth of 11% through fiscal 2028, with higher growth coming out of the firm’s Internet of Things business. We believe BlackBerry’s embedded software solutions for cars and industrial applications are strong and increasing software penetration in vehicles will drive growth. Moves from lower-value infotainment applications into higher-value autonomous driving and digital cockpit applications should lead to a large step function in content per vehicle.”

But Kerwin said he does not share Chen’s optimism about its cybersecurity segment.

“We expect lower growth for BlackBerry’s cybersecurity business, where we believe execution is lacking. We expect the firm to lag cybersecurity competitors outside of its stronger position in regulated government customers,” he wrote. “We anticipate BlackBerry’s margins to improve with volume and improving value for its cybersecurity products. The company commits over 80% of sales to operating expenses, and we see this whittling down toward 70% in five years while BlackBerry keeps organic investment high to expand its customer base. Overall, we see fiscal 2028 non-GAAP operating margin reaching 17%, up from a depressed negative 14% in fiscal 2023 and -10% in fiscal 2022.”