BlackBerry’s (BB) overall outlook remains very bright, as its QNX software unit, in line with my previous predictions, continues to grow rapidly and rack up an ever-increasing number of impressive deals and partnerships. Further, QNX is highly leveraged to Physical AI, a sector poised to expand rapidly for the foreseeable future. Ultimately, the business’s continuing, positive milestones will, in all likelihood, drive BB stock much higher.
But on the other hand, although I had high hopes for BB’s Secure Communications unit in the current, highly confrontational geopolitical environment, the division’s low growth last quarter, coupled with statements by BB’s management during the firm’s fiscal second-quarter earnings call, leads me to believe that Secure Communications will keep expanding at anemic rates for some time. In fact, its revenue could even decline year over year in the coming quarters.
As long as investors worry that Secure Communications is dragging down the company’s overall growth and the division could even dip into the red, BB is unlikely to earn the very high valuations that extremely successful tech firms often receive. As a result, it will probably take at least another two or three years for the shares to double or triple above their current levels.
Conversely, if BB sells Secure Communications or spins off QNX, the latter business could easily be granted an extremely high valuation and soar five- or ten-fold within 12 or 18 months. In recent years, Grail (GRAL) and SanDisk (SNDK) are two examples of high-growth businesses whose stock prices rallied sharply after they spun off from their parent companies.
At this point, BlackBerry is best suited for long-term, conservative investors or those who are comfortable speculating that QNX may stand on its own.
QNX’s High Leverage to Physical AI, Top-Notch Partnerships, and Powerful Growth
From its historical core business of providing software for conventional automobiles, QNX is successfully branching into robotaxis, complex medical devices, and robots. Moreover, in line with my earlier predictions, QNX’s new software platform, Alloy Kore, looks well positioned to be a hit, as a joint venture of Volvo and Daimler, called Coretura, intends to spend more than $100 million on the product.
Also indicating how lucrative Alloy Kore can be for BlackBerry, BB CEO John Giamatteo noted that the company expects to receive three times more revenue per vehicle from the deal than from Coretura’s current QNX deployments.
QNX is also benefiting meaningfully from the ever-increasing use of software in conventional vehicles, Giamatteo noted.
Meanwhile, on the partnership front, QNX has expansive alliances with Nvidia (NVDA), AMD (AMD), and, most recently, Uber (UBER). These deals leave the unit well positioned to penetrate the emerging Physical AI mega sector.
Most encouragingly, Giamatteo said on the Q2 earnings call, “more than 20 companies (are) currently engaging with us around NVIDIA-based platforms.” He reported that Uber (UBER), which is launching an expansive, multinational foray into robotaxis, had “selected QNX as the foundation for software in its next generation of vehicles.”
In Q2, QNX’s top line jumped 27% year over year.
Secure Communications Is Growing Slowly and May Have Big, Upcoming Problems in the U.S.
The unit’s revenue increased just 2% in Q2 versus the same period a year earlier, and its dollar-based net retention rate, a measure of customer loyalty, came in at a relatively low 91%.
Making matters worse, CFO Tim Foote said Secure Communications’ relations with Washington are “being further complicated by recent geopolitical developments, including trade tensions between Canada and the United States.” Although Giamatteo, answering an analyst’s question, indicated that the negative repercussions are limited to “the timing of some … deals,” the situation could easily deteriorate, causing the unit’s revenue to contract year over year. Secure Communications, which is currently profitable, may soon start generating losses.
Finally, the CEO said that the unit “remains stable.” But he did not indicate that he expects the business to undergo a significant turnaround, either in the near term or the longer term. Reading between the lines, the company seems to expect Secure Communications to continue growing slowly, at best, for an extended period.
Operating Units Boost BB Stock
Secure Communications is likely to keep BB stock’s valuation relatively low for years, despite the likely, tremendous achievements QNX will probably attain in the medium-to-long term. Therefore, less patient growth investors should avoid the shares until the firm discloses a spin-off of QNX or until it unloads Secure Communications.
But the name remains attractive for long-term, more conservative investors and those who are willing to speculate that BB will eventually do the right thing for the company and the owners of BlackBerry stock.
This article is intended to be informational only; it is not financial advice.
