Naman Shukla is an Analyst at I Know First. He writes and invests in the stock market. Ranked in the top 8 percentile in TipRanks.com. Featured on SeekingAlpha.com, GuruFocus.com, Valuewalk.com among others.

Blackberry Stock Predictions

Summary

• Doing away with the smartphone business and focusing on software will benefit BlackBerry.
• QNX will be a massive growth driver for the company.
• BlackBerry is a great turnaround play.
• I Know First’s maintains a bullish stance on BBRY

Blackberry (BBRY) has been a range-bound stock for several years now as CEO John Chen has been unable to turn the company’s fortunes around. Blackberry has underperformed the market since his arrival, however things may change going forward. Due to reasons mentioned below, I think BlackBerry is a good turnaround play that investors should consider adding to their portfolios going forward.

Gross margin is still impressive

Blackberry’s revenue has taken a hard hit as it fell to just $2.8 billion in 2016 as compared to as compared to $4.9 billion in the first quarter of 2012. Moreover, BlackBerry’s revenue may continue dipping as the company is still in troubled waters. That being said, I think all the headwinds are currently priced in BlackBerry’s stock, which is why I think it is a good buy right now.

Most of Blackberry’s revenue decline has been mainly due to the lack of headset sales, but a considerable portion of that loss has also arrived from the higher margin Service Access Fees recurring service revenue, which is grounded upon the outdated Blackberry phones.

However, regarding Service Access Fees revenue, BlackBerry has nothing significant left to lose anymore. Therefore, in the near future, it will stop being a problem with analysts, which in turn might be a good thing for the stock.

Apart from this, the company is also anticipating a 30 percent surge in Software and Services revenue in the next year, which will compensate for even a 100 percent loss of Service Access Fees. Not only has this, but S&S also had a higher margin of 75 percent to 80 percent. As a result, with escalating S&S sales and declining handset sales, non-GAAP gross margin will continue enhancing. Higher margin sales will have a direct positive impact on the company’s EPS, which should push the stock higher in the future.

Why QNX matters?

A few years ago, Microsoft’s Windows Embedded Automotive Operating System was used to power the infotainment and navigations systems present in Ford’s vehicles. However, Ford substituted Microsoft’s Operating System with BlackBerry’s QNX Operating System in its new Sync3 platform previous year. This was mainly due to the bad reports of frozen screen, random reboots, as well as unresponsive touch controls.

This was a great opportunity for BlackBerry and can pave the way for its successful future as Ford projects its number of Sync equipped vehicles around the globe to reach 43 million in the upcoming four years from 15 million present today.

As per IHS Automotive, BlackBerry’s QNX is the most popular embedded Operating System in the connected car market. The company’s QNX is used in more than 50 million vehicles globally with a market share of more than 50 percent. The company purchased QNX in 2010, and now it has turned into one of the most significant pillars of its software segment, which produced approximately a quarter of its sales in 2015.

Source: IHS Automotive

Furthermore, strong sales of connected cars will continue to fortify that business, which produces most of its revenue from BES, an enterprise control panel for keeping an eye on employee’s mobile devices. Going forward, QNX will be Blackberry’s main growth driver and given the massive opportunity in the connected cars market, I am bullish on the stock.

What Blackberry is doing?

 Blackberry’s CEO Chen is directing the company towards the software segment. Chen’s vital objective is to convert the company into a software company reinforced by BES, mobile device management services from Good Technology, its Blackberry messaging app for business purpose, and the embedded operating system QNX.

In the last quarter, the company’s software sales surged 21 percent on a yearly basis, but accounted for just 39 percent of its overall revenue. This clearly suggests that the company cannot suddenly move away from its fading hardware business without intensely tumbling its cash flows.

Consequently, the company is progressively declining its exposure to BB10 devices, which are not performing well in the market, and proposing more Android devices fastened to its services, which might perform healthier by attracting Bring Your Own Device (BYOD) users. While John Chen may have been a very efficient CEO by now, this strategy will surely benefit BlackBerry in the years to come.

That being said, he knows that BlackBerry will never be able to reach the level in the Android market which the likes of Samsung have attained, but anticipates that it could give its software business more time to become its primary source of revenue.

In that respect, stockholders should have an eye on the government’s abandonment of Blackberry devices – it might enhance demand for its EMM services such as BES, which Chen affirms formerly governs up to 20 percent of the entire market. All in all, the company’s core software growth engine is safe in the long run and the abandonment of the BB10 devices will be happening sooner or later.

Conclusion

BlackBerry’s transformation may take some time, but it will surely improve its business in the long run. BlackBerry is gaining traction in several high growth markets while doing away with its smartphone business. Given that the company is slowly eradicating the headwinds, I am confident about the stock’s prospects going forward.

My bullish stance on BBRY is resonated by I Know First’s algorithmic signals. This stock has very strong buy signals based on it’s 1-month and 3-month algorithmic market trend forecasts. In the 1-month forecast, the algorithm is giving the stock a bullish signal of 29.83 with predictability of 0.15. In the longer perspective, the algorithm is also giving the stock a strong, bullish signal, of 26.83  and predictability of 0.17  for the 3-month outlook.