BlackBerry Limited (TSX: BB), provides security software and services to enterprises and governments. The Company leverages artificial intelligence (AI) and machine learning to deliver solutions in cybersecurity, safety and data privacy and offers endpoint security management, encryption, and embedded systems. 

Key highlights

• New order win: Recently, the company announced its collaboration with Mahindra & Mahindra Ltd., one of India's leading automotive companies, wherein the group would provide its leading-edge CDC platform to the new XUV700 SUV. The above technology is based on a single hardware platform, which reduces initial development and long-term costs of ownership and also provides the highest standards of functional safety and security.
• Impressive long-term goals: Recurring Software Products are the company's main source of revenue. A larger recurring revenue boosts repeat business while also ensuring performance consistency. The goal is for it to account for 90% of overall revenue, ensuring that the company's top line continues to expand steadily in the future. In FY21, the firm recorded a gross margin of 73%, and it is aiming for a gross margin of 80% to 85 percent in FY22. The company is also looking for a 25%–30% EBITDA margin, up from the current 16%. To meet the above objectives, the firm is concentrating on product innovation and future category investments, as well as implementing a scalable financial model based on increased recurring income.

Source: Company Filings 

• Rising addressable market: The products of the company are being used across several new areas due to the rising security concerns across the globe. We believe the above increase in demand is likely to support the company’s operations, which is a key positive. Furthermore, by FY2025, the company is expecting a huge rise in its total addressable market, where IoT segment would be of around USD 45 billion, and the cyber segment will be of around USD 44 billion. This rising share provides large opportunities to the company.

Source: Company Filings 

Financial overview of Q2 2022 (In millions of USD)

Source: Company Filings 

• In Q2 2022 the Company reported consolidated revenue of USD 175 million, which decreased by 32% compared to USD 259 million in the previous corresponding period. Although, the performance from Cyber Security and IoT segment were much pretty, but the Licensing and Other segment did not perform well due to which the consolidated revenues declined.
• On the back of lower revenues and higher cost of sales the gross profit fell to USD 112 million compared to USD 199 million in pcp.
• The company saw higher operating expenses due to debentures fair value adjustment and reported an operating loss of USD 141 million compared to USD 22 million in pcp.
• Net loss in the reported period stood at USD 144 million against USD 23 million in pcp.
  

Risks associated with investment

The company’s product requires constant innovation in order to remain competitive and to retain its market share. Hence, this could cost higher R&D expenses, which might impact the company’s profitability and cash flows.

Valuation Methodology (Illustrative): EV to Sales Based 

Stock recommendation

In the midst of worldwide chip scarcity concerns, the Cyber Security business unit generated strong sequential billings and revenue growth, while the IoT business unit performed well. In the IoT, design activity for the company's QNX products is still quite high, demonstrating the company's industry leading position as well as secular tendencies. Furthermore, the effectiveness of its AI-driven products gained strong third-party validation in Cyber Security. We also expect the company to produce solid figures in the near future as a result of new collaborations and product launches. Moreover, by FY2025, the company is expecting a huge rise in its total addressable market, which would provide large opportunities. Hence, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 11.47 as on December 15, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 15, 2021). Source: Kalkine, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

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