The only forces holding back BlackBerry (NYSE:BB) stock from reaching the $30-$40 level are related to its name and former reputation.
In the play Romeo and Juliet, Shakespeare famously wrote, “What’s in a name? That which we call a rose by any other name would smell as sweet.”
But in our world, names and the reputations that go with them do matter a great deal. Yet companies’ stock prices should primarily be determined by their performance and outlook, rather than by a reputation they attained from the distant past.
BB stock doesn’t have a great reputation.
In the current market, what should investors be willing to pay for a profitable tech company that’s highly leveraged to two huge trends, is poised to grow moderately quickly in the near-term, is developing a tremendously promising partnership with Amazon (NASDAQ:AMZN), and is about to get a gigantic one-time payment?
I would say at least 15 times revenue. BlackBerry has all of these characteristics, and its trailing price-sales ratio is only 5.5.
I think that the skepticism towards the company’s name, driven by its struggles from long ago, is holding back BB stock. But as investors finally realize the ridiculousness of that situation, its shares will climb dramatically.
Trends, Growth, and Profits
BlackBerry is at the forefront of two of the biggest trends today: IT security and automotive autonomy.
Specifically, its cybersecurity business provides IT security for companies and government entities using artificial intelligence and its “zero-trust architecture” to protect computer systems from hacks which are becoming extremely prevalent and costly.
Meanwhile, its highly secure QNX operating system and important innovations by the company shield connected cars and advanced driver-assistance systems (ADAS), which of course are rapidly proliferating, from hackers.
On the growth front, BlackBerry CEO John Chen, speaking on the company’s recent fourth-quarter earnings conference call, predicted that its software and services revenue would jump 9%-15% in its current fiscal year that began in March.
Moreover, the company expects the billings of both its main businesses to climb at least 10% this year.
Turning to profitability, in its last fiscal year, BlackBerry’s “net cash from operating activities” came in at $82 million. As its revenue jumps this year, its cash gains should surge dramatically.
The Amazon Partnership and More
I wrote extensively about BlackBerry’s partnership with the e-commerce and cloud giant in my last article about BB stock.
Basically, the companies are developing apps for connected vehicles. In my last column, I predicted that such apps would prove to be quite lucrative.
In BlackBerry’s recent conference call, Chen provided a data point to bolster that assertion. Quoting the well-respected consulting firm, McKinsey, he stated that “The vehicle data analytics market” alone would be worth “$450 billion to $750 billion per year by 2030.”
Chen also reported that BlackBerry and Amazon are taking important steps to develop the app store, which they are calling IVY.
For example, the companies have launched a $50 million fund that will help startups develop and adopt IVY. Further, Amazon has agreed to give participating firms “access to up to $100,000 in AWS credit as well as insight and guidance through the AWS Activate Program,” Chen noted.
Finally, BlackBerry is poised to receive a huge one-time payment soon. BlackBerry is in talks with “a North American party” about selling its patents “primarily related to mobile devices, messaging, and wireless networking,” Chen stated.
On StockTwits, I saw a rumor stating that the “North American party” in question is Facebook (NASDAQ:FB). That makes sense, since Facebook was sued by BlackBerry over alleged patent violations and Facebook then suffered a major setback in the case last December.
The two companies entered settlement talks, but a deal was never announced. It would make sense for Facebook to believe that, if it had to pay BlackBerry hundreds of millions of dollars, it may as well buy the relevant patents in the process.
Needless to say, Facebook has a ton of money, and its legal setback gives it incentive to make a deal with BlackBerry. I expect BlackBerry to get at least $1 billion from the deal.
During the conference call, Chen indicated that the deal would be done by July 31, saying that, in a “conservative scenario,” BlackBerry estimated “that negotiation and regulatory review (for the deal) continue for the first half (of BlackBerry’s fiscal year.)”
The first half of BlackBerry’s fiscal year ends on July 31. As a result, I expect a deal to be announced by then.
The Bottom Line on BB Stock
Blackberry’s shares are tremendously undervalued, but that situation will change over the next year, as the app store starts being rolled out, the company’s revenue climbs meaningfully, and it receives a big one-time payment for many of its patents.
On the date of publication, Larry Ramer held a long position in BB.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
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