Will BlackBerry (BlackBerry Stock Quote, Chart, News TSX:BB) rise again to become a second-time-around Canadian tech success story? Not likely, says portfolio manager Teal Linde, who thinks the odds are stacked against the erstwhile phone-maker to complete the rare tech turnaround.
With all the turmoil in the markets this year, it’s tough to see where stocks are going, especially in the on-again, off-again tech sector, which captured investor attention in the earlier months of the pandemic but has been in more of a holding pattern of late. That would go double for BlackBerry, which sunk like the rest of the market in February and March but recovered somewhat into June. Since then, BB hasn’t gone anywhere, flatlining between C$6.00 and C$7.00 per share and putting itself on course for a return of negative 18 or 19 per cent if things stay roughly the same over the next month and a half.
That’s not great news for a stock coming off a multi-year slide as investors appear to be losing faith in the company’s reincarnation as a cybersecurity and IoT software business. For the past three years, BlackBerry’s stock is now down by about half.
The company had raised interest and eyebrows a number of years ago now with its plans of a revival, bolstered by a war chest of patents and a CEO in John Chen who’s experienced in the art of the comeback through his previous work with enterprise software company Sybase, acquired by SAP a decade ago.
Chen’s approach to BlackBerry has been to build on its reputation as a secure communications platform and to push the business into hotter sectors in the connected tech and security fields, through developing its QNX platform now found in a number of vehicle systems and through a major purchase last year of Cybase to establish its cybersecurity credentials.
The current COVID-19-related economic environment seems to be both good and bad for BlackBerry, as witnessed in the company’s latest quarter, its fiscal second 2021 delivered near the end of September. There, BB saw revenue climb from $244 million to $259 million a year earlier on stronger than expected results from its Spark endpoint management platform, but the company’s auto sector business has at the same time been hit by an industry-wide slowdown. (All figures in US dollars except where noted otherwise.)
“Some signs of recovery in auto production point to sequential revenue growth and a return to a normal run rate for QNX by early next year,” said Chen in a press release. “Continued QNX design wins and significant cybersecurity partnerships position the business strongly for the future. We are also seeing positive signs from our focus on the key components of our go-to-market strategy, including: strong channel partnerships, marketing, customer success and investing in new talent for our sales force.”
But Linde doesn’t feel Chen’s optimism. Instead, he argues investors should be careful with the higher risk quotient from BlackBerry.
“It’s basically a technology turnaround stock, and I would be wary of investing in a tech company in anticipation of a turnaround,” said Linde, manager of Linde Equity Fund, who spoke on BNN Bloomberg on Monday. “It’s very difficult for tech stocks to turn around and the vast majority of them never do.”
“If you want to look for something that’s of a turnaround nature, you’d probably be better off looking at a cyclical industry where you have the industry cycle as your tailwind to help you recover and gain share price value,” he said.
“BlackBerry was the king in terms of cellphones, but they’ve lost that to Apple and to the Android and so they’re looking for new ways to create a new business, but it’s very doubtful that they’ll create businesses that are going to be as large as what they once had,” Linde said. “The risk/reward of buying tech companies that are trying to turn themselves around is not as attractive as buying turnaround stocks in other industries, so it’s one we would shy away from.”
The cautious sentiment seems to be shared by TD Securities analyst Daniel Chan who retained his “Hold” rating on BlackBerry but upped his target from $5.00 to $6.50 in a research report on September 25. Meanwhile, major BlackBerry shareholder Prem Watsa of Fairfax Financial, a long-time supporter of the company, more than doubled his stake in BB in September, saying the company is still a work in progress. Watsa now has 30-per-cent ownership in his portfolio.
BlackBerry scored beats in its fiscal Q2 results in September, with the $259-million in revenue coming out ahead of analysts’ average estimate of $239.7 million and earnings per share of $0.11 were also better than the Street’s estimate of $0.02 per share. BlackBerry is due for a fiscal third quarter report in mid-December.