Can BlackBerry (BB) Beat Market Woes On Inorganic Growth?

On Dec 3, we issued an updated research report on wireless services provider, BlackBerry Limited (NYSE:BB) .

The company recently inked a definite agreement to acquire Irvine, CA-based cybersecurity firm Cylance for $1.4 billion in cash. The transaction, which is one of the largest in recent years, is likely to be completed prior to the end of Blackberry’s current fiscal year in February 2019.

Privately-owned Cylance has created a niche for itself in the cybersecurity domain with a highly recurring revenue stream. It has more than 3,500 active enterprise customers, including premier blue-chip companies. It is a pioneer in applying AI, algorithmic science and ML program to cybersecurity software to protect mobile devices, tablets and other Internet-connected devices from cyber attacks. This fast-growing company’s software is designed to consume less power, both in online and offline modes.

Cylance’s highly skilled cybersecurity workforce and market-leading portfolio of endpoint solutions are a strategic fit for Blackberry (TO:BB) and will complement its Unified Endpoint Management and QNX businesses. The company further expects that the addition of Cylance will enhance the cybersecurity capabilities of Blackberry Spark, making it an indispensible proposition for Enterprise of Things (EoT). While BlackBerry Spark offers secure chip-to-edge communications platform for EoT to create trusted connections between any endpoint, QNX empowers leading original equipment manufacturers to build secure, scalable and trusted software solutions for connected and autonomous cars.

Operating as a leading player in the enterprise mobility management, BlackBerry is widely recognized for productivity and security innovations. The company delivers one of the most secure end-to-end mobile enterprise solutions in the market through a broad portfolio of products and services. It offers an end-to-end software and services platform for the EoT, which includes computers, vehicles, sensors, equipment and other connected endpoints within the enterprise that communicate with each other to enable smart business processes.

The company leverages its extensive technology portfolio to extend the best-in-class security and reliability features. These include a unified endpoint management solution that provides comprehensive multiplatform device, application and content management with integrated security and connectivity, embedded systems, enterprise applications and related services. With a holistic growth model, focusing both on organic and inorganic investments, BlackBerry aims to extend its market leadership in the enterprise mobility segment.

With the digital transformation of enterprises, the number and scope of connected devices have also expanded manifold to include other endpoints such as vehicles. With the rapid growth of this network of connected endpoints, often referred to as the Internet of Things, security has become increasingly important to thwart data theft. This landscape has created opportunities for secure management solutions, embedded systems, communications platforms, enterprise applications, networks and analytic tools as well as for related services that help enterprises to enhance data security and user privacy.

Despite the positives, BlackBerry has underperformed the industry with an average decline of 26.2% in the past six months compared with a fall of 3.2% for the latter. The company’s second-quarter fiscal 2019 GAAP revenues decreased 11.8% year over year to $210 million due to lower revenues from Service access fees and Handheld devices. Moreover, legal issues like the payment dispute with Nokia (HE:NOKIA) Corporation (NYSE:NOK) have hit its long-term credibility.

High technological obsolescence also remains a significant challenge for the company, increasing its operating costs for continuous R&D efforts for frequent new product introductions to fend off competition. Moreover, with increasing global exposure, BlackBerry faces the risk of adverse foreign exchange fluctuations. Apart from adverse foreign currency-related movements, high debt levels are also concerning. The company exited second-quarter fiscal 2019 with long-term debt of $739 million.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. A couple of better-ranked stocks in the broader industry are Juniper Networks, Inc. (NYSE:JNPR) and Harris Corporation (NYSE:HRS) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Juniper has a long-term earnings growth expectation of 5.5%. It surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 11%.

Harris outpaced estimates in each of the preceding four quarters, the average earnings surprise being 7.1%.

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