Written by Vineet Kulkarni at The Motley Fool Canada
TSX tech stocks have been in great touch this year, as macroeconomic challenges seem to be easing. While it still looks too early to celebrate, tech names are up a decent 36% so far. Interestingly, one of the investor-favourite names, BlackBerry (TSX:BB) stock has surged a stellar 60% this year. A considerable move came this month, and the stock is up more than 30% in May 2023.
So, what’s exactly happening with BlackBerry?
Early this month, BlackBerry announced that it is considering a reconfiguration of its business portfolio. Now, for those who don’t know, once smartphone maker BlackBerry now functions mainly through two verticals: cybersecurity and the Internet of Things (IoT).
Even though both these are jazzy businesses that offer handsome growth prospects, the company has been seeing quite uneven growth. Nearly 60% of its total revenues come from the Cybersecurity segment, while the IoT obtains around 35%. The rest comes from the Licensing segment.
BlackBerry’s revenues have been on a steady decline for the last few years, thanks to a dip in its core Cybersecurity segment. To be precise, it posted revenues of US$656 million for the 12 months ended on February 28, 2023, a drop from US$2.16 billion in 2016. The cybersecurity business is exposed to steep competition and has thus seen a burden on margins.
At the same time, IoT remains the bright spot for BlackBerry. This vertical posted a decent 16% top line growth in the fiscal fourth quarter. Notably, the surge came despite snaps in the global automotive markets. Moreover, this vertical also derives superior margins than the other segments, upwards of 80%.
A split could be value accretive
Shareholder value creation has taken a toll, as these two verticals seem to be going on different growth paths. As a result, the company has taken up a review to consider a potential separation of its businesses. Investors cheered the move on prospects of better value creation.
The management is more optimistic about the IoT segment’s growth. In Q4 2023 earnings call, the company provided guidance of 20% revenue growth for fiscal 2024, mainly due to easing challenges in the global auto market. BlackBerry QNX is the highlight in this segment. It’s software for cars that enables a more customized and interactive driving experience. It had a record US$640 million new royalty backlogs last year.
In the cybersecurity segment as well, the management expects a decent 5% revenue growth in the next fiscal year. If the guidance materializes, it will likely bring a huge reward for the stock, particularly after such a steep long-term revenue decline.
Plateauing inflation indicates that interest rate hikes could pause in the near future. This will be a positive development for tech stocks. But it seems already baked in considering their recent rally. It will be interesting to see how they play out in the second half of 2023, especially when an economic downturn seems on the cards.
BlackBerry’s upbeat guidance and portfolio reconfiguration highlight management’s focus on shareholder value creation. Although it seems logical to separate the IoT vertical from the lagging Cybersecurity segment, that does not warrant a sure-fire value creation. The challenges like heavy capex needs and competition will likely still be there. In the long term, revenue growth and margin stability remain the key factors that will drive the value.
Before you consider BlackBerry, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in April 2023... and BlackBerry wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 21 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 4/18/23