BlackBerry’s Negative Q4 Warning Shows Cybersecurity Business Going From Bad to Worse

We lower our fair value estimate for no-moat BlackBerry BB shares to $4.90, from $5.90, after a negative warning of upcoming fiscal fourth-quarter results. BlackBerry’s cybersecurity business is having a horrid fiscal 2023, which fully reflects execution issues from the firm, in our view, that we expect to continue. We continue to view the auto business as a bright spot but one mostly blocked out by the shadow of a struggling, larger cyber business. Shares dropped 13% on the news and continue to trade below our fair value estimate. We would point investors to moatier software names at this time.

BlackBerry’s preliminary fiscal fourth-quarter results missed our expectations due to weak cybersecurity sales. Management cited some significant deals being pushed out into fiscal 2024, but we also see this as endemic of BlackBerry’s struggles to execute against stronger and moatier security competitors. The firm’s fiscal 2023 preliminary security sales dropped 12% year over year, which implies share losses from an already-small position in a growing market. BlackBerry also announced plans to take a $440 million impairment charge to its Spark suite, which is one of its flagship products encompassing security and endpoint management. Such an impairment reflects a weak competitive position for the long term, in our view. The firm also announced upcoming revisions to its long-term cyber growth targets at its May 2023 analyst day. We were already skeptical of management’s lofty targets for security growth but would view a downward revision negatively. Viewed together, we see these announcements as part of a narrative of a security business that is floundering. We don’t anticipate a turnaround in the short term, and we’ve once again lowered our long-term forecast.