Written by Puja Tayal at The Motley Fool Canada
Wait! Did BlackBerry (TSX:BB) stock just pop up 17.4% in a day and 23% in four? Are the Redditors back? Such wild jumps were last seen in this stock in January 2021 when Redditors targeted BlackBerry for short selling. Don’t worry! It is no trading game this time. There is news, or rather a rumour.
Why did BlackBerry stock jump 23%?
Media reports, citing sources familiar with the matter, said that private equity firm Veritas Capital has made a takeover of BlackBerry. The sources also that Veritas could change its mind. Moreover, it is seeing acquisition interest in whole or parts of BlackBerry.
Before the offer, neither party had confirmed the rumour. But the news did trigger optimism among BlackBerry investors who have been waiting for a very long time for the Canadian tech icon to reach its inflection point.
Investors are excited because Veritas Capital acquires technology firms that cater to governments, especially national security. Its other focus areas are healthcare and education. Even though it is a rumour, Veritas could be a potential acquirer for BlackBerry’s cybersecurity business, which caters to governments.
For the last two years, the cybersecurity segment, which contributes 64% of BlackBerry’s revenue, has been falling due to an elongated sales cycle arising from economic uncertainty. However, the company reported a 37% increase in total contract value billings, hinting at a major contract win.
Thus, when the Veritas rumour made rounds on Wall Street, it raised investors’ hopes of receiving a premium, sending the stock up 23%.
Is BlackBerry really looking for a potential buyer?
While BlackBerry fits Veritas’s portfolio, does the cybersecurity firm want to get acquired? It is true that the company hired investment bankers Morgan Stanley and Perella Weinberg to help them review their business and identify opportunities to unlock shareholder value. Among the many considerations was the spin-off of the cybersecurity and Internet of Things (IoT) segments.
Many Canadian companies have been announcing spin-offs: TC Energy is separating its oil pipelines business and Algonquin Power & Utilities its power business. A spin-off could help companies working in different businesses focus on each separately. BlackBerry’s cybersecurity business caters to governments, and IoT caters to automakers and auto original equipment manufacturers. Hence, the sale of a car part or whole business could also be considered.
What is up the software company’s sleeve?
But BlackBerry still has organic growth potential even if no acquisition happens. It is true that the company has been struggling for that inflection point where its sales boost significantly. Such inflections are common in the tech space. Remember, it took Amazon and Tesla a long time before they could grow by leaps and bounds.
BlackBerry could be a similar story as it has the tech, and its products are gaining traction among governments and automakers. BlackBerry’s QNX operating system is used by most major automakers. Moreover, the convergence of all IoT devices with the cloud and data centre in a secured ecosystem is the future need, and BlackBerry has the resources to fulfill this need.
According to a McKinsey report, BlackBerry is well-positioned to capitalize on the US$750 billion convergence trend.
The IoT proliferation and the growing automation of cars will help BlackBerry reach an inflection point. Also, the company has a $640 million royalty backlog that will be realized once automotive production picks up. This royalty depends on the number of QNX-powered cars shipped. But headwinds after headwinds have been delaying the growth.
Staying invested for the long term
While several analysts are bearish on BlackBerry, I continue to be bullish. If the company maintains its set growth focus, it could achieve success in the long term. If it chooses the mode of acquisition, Blackberry would be better off selling its three businesses – IoT, cybersecurity, and licensing – separately. They can generate higher premiums separately than together.
Nevertheless, now is not a good time to buy BlackBerry stock. Because if the acquisition happens, the stock has limited upside. If an acquisition falls through, the stock could also fall. But if you bought the stock below the $5 price, you could hold it for the long term.
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