Software Defined Vehicles And Secure Communications Will Support Long Term Upside Potential

Catalysts

About BlackBerry

BlackBerry provides software for safety critical embedded systems and secure communications for governments and regulated industries.

What are the underlying business or industry changes driving this perspective?

• Rising adoption of software defined vehicles and centralized compute is supporting QNX design wins across ADAS, cockpit and multi domain architectures. This can feed future royalty revenue as programs enter production and raise the share of higher margin software in total revenue.
• Growth in Physical AI, robotics, industrial automation and medical devices is expanding GEM demand for deterministic, safety certified operating systems. This can widen BlackBerry's addressable market beyond automotive and support long term QNX revenue and backlog.
• Alloy Kore is expected to move BlackBerry from an operating system supplier to a broader platform provider. This can increase software content per vehicle by multiples and, if adopted at scale, raise average selling prices and support earnings and EBITDA expansion.
• Deepening partnerships with NVIDIA, Qualcomm, ARM and other chip vendors position QNX within next generation intelligent systems programs. This can feed design win pipelines, support backlog growth and provide visibility into medium term revenue and margin contribution.
• Government focus on digital sovereignty and secure communications is supporting large, multi year deployments such as the Shared Services Canada expansion. This can add sizeable software revenue, support ARR growth and help maintain double digit EBITDA margins in Secure Communications.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on BlackBerry compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming BlackBerry's revenue will grow by 10.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.3% today to 17.9% in 3 years time.
• The bullish analysts expect earnings to reach $140.1 million (and earnings per share of $0.21) by about July 2029, up from $59.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 60.4x on those 2029 earnings, down from 109.0x today. This future PE is greater than the current PE for the US Software industry at 34.8x.
• The bullish analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• QNX royalties and development licenses are closely tied to long product cycles in automotive and GEM, so any slowdown in software defined vehicle adoption, delays in centralized compute programs or smaller than expected GEM deployments could leave BlackBerry with lower royalty conversion from its current design win pipeline, which would pressure long term revenue and earnings.
• Secure Communications is described as relying on large, long cycle government contracts on top of a core ARR base, so fewer new government wins or delays in digital sovereignty projects similar to the Shared Services Canada expansion could reduce the contribution of high margin software deals, which would weigh on revenue growth and limit adjusted EBITDA and net income expansion.
• The outlook for Alloy Kore assumes that it can move BlackBerry from operating system supplier to a broader platform provider with much higher software content per vehicle. If OEMs are slow to adopt the platform, choose alternative solutions or limit Alloy Kore to a narrow set of programs, the company may not realize the expected uplift in average selling price and backlog, which would constrain future revenue and margin improvement.
• GEM is identified as the fastest growing part of QNX with exposure to Physical AI, robotics, industrial automation and medical devices. Increased competition from open source or other vendors in these categories, or slower adoption of deterministic, safety certified operating systems, could reduce win rates and shrink the long term addressable market, which would dampen revenue growth and reduce operating leverage across the QNX segment.
• Management points to strong operating leverage and higher margin QNX royalties as reasons adjusted EBITDA and earnings can scale faster than revenue. Any shift in mix toward lower margin services, smaller one off licensing deals or higher ongoing investment to pursue GEM, Alloy Kore and Secure Communications opportunities could limit margin expansion, which would hold back growth in net income and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for BlackBerry is CA$17.02, which represents up to two standard deviations above the consensus price target of CA$11.47. This valuation is based on what can be assumed as the expectations of BlackBerry's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.02, and the most bearish reporting a price target of just CA$7.39.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $781.2 million, earnings will come to $140.1 million, and it would be trading on a PE ratio of 60.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of CA$15.75, the analyst price target of CA$17.02 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.