BlackBerry is looking oversold, this analyst says

What can we make of BlackBerry (BlackBerry Stock Quote, Chart, News NYSE, TSX:BB), a stock that has taken it on the chin lately? Is BlackBerry oversold?

Possibly, says technical analyst Jon Vialoux, who argues that while the seasonality on BB actually looks good, it’s unclear what the stock’s long-term prospects look like.

September was a month to forget for BlackBerry, which started off on a bit of an uptrend but dropped like a stone on the company’s quarterly earnings mid-month. A slowdown in growth and indications of dimmer prospects over upcoming quarters were the culprits.

BlackBerry’s second quarter fiscal 2020 featured break-even earnings, in line with analysts’ expectations, on non-GAAP adjusted revenue of $261 million. That top line was up 22 per cent year-over-year but came in lower than the consensus estimate of $266 million. The company reported a five-per-cent drop in sales from its enterprise software and technology solutions (ESS) segment, down to $134 million, which was below the $150-million analysts had predicted. (All figures in US dollars except where noted otherwise.)

Management’s guidance was also troubling, as CEO John Chen warned of slower growth from BlackBerry’s ESS business for the upcoming two quarters, as the company looked to retool its ESS sales team.

“We achieved break-even non-GAAP earnings per share and generated free cash flow even with increased investments in sales and product development to support future growth,” said John Chen, Executive Chairman and CEO, in the quarterly press release. “We are encouraged by the positive reception on BlackBerry Intelligent Security, and we have a number of exciting new product launches in the next six months.”

The market pulled down BB’s share price by 22 per cent in one trading day, going from C$7.51 on September 21 to C$5.81 by the next day’s close. Since then, the stock has kept dropping and has ventured into territory not seen since before its rise as a smartphone giant in the early 2000s.

Vialoux, associate portfolio manager at CastleMoore Investment Counselling & Portfolio Management, says that while the stock may now be in oversold territory, the upside could be limited.

“We talked about gold stocks during a period of seasonal strength [having] higher highs and higher lows that are quite defined. This one is showing the opposite, a trend of lower lows and lower highs,” says Vialoux, who spoke on BNN Bloomberg on Thursday.

“What I want to see is signs of buying demand. Typically, you use the performance of the investment relative to the market. It’s still strongly underperforming the market,” he says. “The best that I can say is that it has become oversold and perhaps you should find some stability here, but the fact that it did gap lower following earnings just gives a cap to the stock at about C$8.50 to C$9.00. So, if you do get a rebound it would be to that range, which would still be a respectable gain from about C$6.80 to C$8.50.”

The negative sentiment on BlackBerry appears to be related to market impatience with the company’s multi-year turnaround, which was supposed to drive revenue through reorienting towards cybersecurity and IoT solutions rather than the now-sold smartphone business.

“This was going to be the year they started to grow [total] revenues by at least double digits,” CIBC analyst Todd Coupland said to the Globe and Mail on Tuesday. “That hasn’t happened.”

Yet Vialoux says BlackBerry might represent a buy if kept on a tight leash.

“It’s not something that I’d be playing for a longer-term basis but if you’re tactical, it could be for a medium-term basis. The seasonality is actually positive ahead,” says Vialoux. “We’re talking technology and how cyclically sensitive tend to do well all the way to February and BlackBerry shows the same. So it is seasonally positive but you have to be tactical.”