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Blackberry – An Enterprise of Things Stock

If you’ve ever been in a business strategy class, you’ve probably been asked the big question. What’s the number one thing that a business needs to do? You might hear answers that talk about profitability, shareholders, and revenues. Those are all answers that make sense, but they’re not the right answer. The number one thing any business needs to do is survive. When you see large businesses fail, it’s because they didn’t focus on this single goal. When a business is in dire straits, and some BSD walks in there and turns things around, it’s a testament to why we pay C-level talent such ridiculously high levels of compensation. (Marissa Mayer being one exception.) Take a look at the below chart:

Blackberry's shrinking business

Source: Blackberry

That red X you see above is when a man by the name of John Chen stepped into Blackberry (BB) as their new CEO and Chairman. Since then, he has led the company through a period of falling revenues and losses to a point where profitability has actually been restored. The icing on the cake? He just made a $1.6 billion acquisition, picking up a firm we’ve talked about before that uses artificial intelligence for cybersecurity – Cylance. When we read the news, we were surprised to hear that Blackberry was still around and decided to dig into what’s been going on with this firm that many have already written off.

Blackberry’s Turnaround

There’s no point getting into why Blackberry found themselves in such a bad situation and why a turnaround was needed in the first place. The above chart tells us everything we need to know. Revenues fell off a cliff, everyone lost confidence in the company’s strategic direction, and raising capital under such conditions became difficult. The first thing Mr. Chen needed to do was try and survive, something he was able to accomplish by focusing on high-margin product offerings. As a result, he managed to steer the company away from the cliff and return it to profitability:

Blackberry's recent financial performance

Source: Blackberry

That $2.4 billion in cash is the war chest that Blackberry used to purchase Cylance, a company that promises to secure Blackberry’s Enterprise of Things platform. Let’s talk about the Enterprise of Things.

Blackberry and the Enterprise of Things

Frankly, we’re growing really weary of all the “X of Y” variations out there. First, we had the “Internet of Things” (IoT) which we’re all cool with. Everything in the world is going to be connected soon and all those connections will produce big data which we learn from. Straightforward stuff. Then came the “Industrial Internet of Things” (IIoT), another play on IoT but somehow more focused on industry. Clearly it’s not working out too well for General Electric, a company we had high hopes for in the IIoT space. Then just days ago, we talked about the “Location of Things” (LoT) which is all about managing mobile assets. Finally, we arrive at the “Enterprise of Things” (EoT) which is Blackberry’s contribution. Here’s a Venn Diagram which doesn’t explain much:

The Enterprise of Things explained

As everything becomes more “hyper-connected”, there’s an increase in the number of baddies who want to hack into all these connections and wreak havoc. The number one thing that keeps a CTO awake at night is the thought of reading in the morning paper about how all of his company’s customer records were made available on the Dark Web. According to Gartner, security is the #1 technical barrier keeping companies from diving headfirst into EoT. That’s why Blackberry acquired Cylance.

Blackberry and Cylance

Click for company websiteGoing back to an earlier article we wrote on 6 AI Cybersecurity Startups Keeping You Safe, we talked about how Cylance uses machine learning “to protect computers from attacks using just 1 percent of CPU and 60MB of memory on a machine without any internet connectivity.” That’s exactly the sort of protection you need for an IoT device out in the field that has intermittent connectivity with the mother ship. Then there’s its flagship product, CylancePROTECT, which is antivirus for malware that doesn’t even exist yet. The software uses a mathematical approach to detect threats before they begin—like a good wingman at a bachelor party. Cylance protects more than 14.5 million endpoints for more than 3,400 customers worldwide.

In one case study, a $40 billion finance firm switched over to Cylance after using McAfee and FireEye (which they claimed was cost prohibitive.) With CylancePROTECT running on the company’s endpoints, three security analysts that once spent nine hours total per day weeding out false positives now spend only 1.5 total hours on that same task. Saving your customers’ money always makes for an easy sell, and Blackberry can immediately begin selling the Cylance solution to their existing customer base:

Blackberry's customer list

Source: Blackberry

In all likelihood, the Cylance solution will be integrated into a platform that Blackberry calls “Blackberry Spark.”

Blackberry Spark

During the keynote speech he gave at the Blackberry Security Summit in New Yawk last month, Mr. Chen talked about the Blackberry Spark communication platform that promises to secure the entire “Everything of Everything”, and how the company plans to use machine learning as a competitive advantage.

“Every word sounds exciting but I don’t know what the hell it means,” Mr. Chen remarked humbly as he talked about a Blackberry company called Certicom that has now come up with a quantum resistant Code Signing and Key Management Server which promises to secure all those things for when quantum supremacy is announced. Throughout the presentation, he talked optimistically about the company’s future as a security platform for the Internet of Things.

Mr. Chen doesn’t consider his company to be going through a turnaround. That time has already passed. In just 5 years’ time, Blackberry has managed to completely pivot from a company that used to sell obsolete hardware devices to a company that sells software to enterprises. Just look how impressive these numbers are:

Blackberry's Pivot

Source: Blackberry

Whether you think Blackberry makes for a good investment or not, you have to admire how this company has turned itself around in such a short period of time.

Conclusion

As investors, we’ve learned that stock picking is an exercise in humility – especially when it comes to tech stocks. It’s the boring non-tech stocks that let you sleep well at night, and strategies like dividend growth investing provide predictable and growing income streams that help offset inflation. Just think about all the investors who bought shares of Blackberry around their peak at over $130 a share. No matter how compelling any investment thesis is, the market has a way of making you question your convictions in no time flat.

Is Blackberry a good investment as a play on the Internet of Things and cybersecurity? Who knows, but Mr. Chen is a compelling leader who makes us believe that his $4.8 billion company has lots of future potential as a security provider for the Enterprise of Things. Maybe IBM’s fearless leader can take some lessons here as we’re all getting tired of waiting for that ship to sail.

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