Advanced Driver Assistance Adoption Will Strengthen Safety Software And Support Long Term Earnings Durability

Catalysts

About BlackBerry

BlackBerry provides safety-critical embedded software and secure communications solutions for automotive, industrial, government and enterprise customers, with a growing base of high-margin recurring revenue.

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

• Rising adoption of advanced driver assistance and software-defined vehicles, evidenced by QNX design wins with leading Tier 1s and platforms such as Snapdragon Ride Pilot and NVIDIA DRIVE, is set to increase high-margin royalty streams and accelerate overall revenue growth.
• Growing regulatory focus on functional safety and cybersecurity in automotive and industrial markets, reinforced by QNX OS for Safety 8.0 certification and TUV Rheinland audits, should support premium pricing and sustain QNX gross margins in the low 80 percent range.
• Expansion of QNX into general embedded markets such as medical instrumentation, industrial automation and robotics, including humanoid robotics wins, broadens the addressable market and diversifies revenue, improving the durability of earnings through cycles.
• Heightened geopolitical and data sovereignty concerns are increasing demand for secure UEM and SecuSUITE solutions, as shown by German and U.S. government deals and improved net retention, which should underpin ARR growth and support Secure Communications EBITDA margins in the mid-teens.
• Scale benefits from a growing ecosystem of developers and university programs using QNX, alongside disciplined OpEx control and a stabilizing R&D investment level, are likely to enhance operating leverage, expanding adjusted EBITDA margins and supporting positive free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming BlackBerry's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $142.2 million (and earnings per share of $0.22) by about June 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 analysts, the company would need to trade at a PE ratio of 35.6x on those 2029 earnings, down from 100.9x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• 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 7.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The QNX division is showing accelerating momentum with 15 percent year over year revenue growth, industry leading 83 percent gross margins and a solid pipeline in both automotive and general embedded markets, which could translate into sustained double digit revenue growth and higher earnings, pushing the share price higher rather than flat through operating leverage and expanding adjusted EBITDA margins.
• Secular adoption of advanced driver assistance systems and software defined vehicles, reinforced by new design wins in China and partnerships with Qualcomm and NVIDIA, may drive a growing stream of high margin royalty revenue over multiple years, structurally lifting BlackBerry’s top line and net income and creating upside pressure on the valuation.
• Expansion into new safety critical verticals such as medical instrumentation, industrial automation and humanoid robotics suggests a broadening addressable market beyond autos, which can diversify and stabilize revenue while supporting margin resilience, potentially leading to higher long term earnings growth than currently embedded in the share price.
• The Secure Communications division is shifting more business to recurring hosted and software only models, evidenced by multi year government contracts and improving annual recurring revenue and net retention, which could steadily raise predictable revenue, support mid teens EBITDA margins and justify a higher earnings multiple over time.
• Management is guiding to rising company wide revenue, expanding gross margins and materially higher adjusted EBITDA and operating cash flow for fiscal 2026, while also executing share buybacks that reduce the share count, a combination that can amplify earnings per share growth and make a flat share price increasingly unlikely if guidance is met or exceeded.

Valuation

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

• The analysts have a consensus price target of CA$10.22 for BlackBerry based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.03, and the most bearish reporting a price target of just CA$6.21.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $738.9 million, earnings will come to $142.2 million, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 7.8%.
• Given the current share price of CA$14.62, the analyst price target of CA$10.22 is 43.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.