A lot is going wrong with BlackBerry, this portfolio manager says

Fans of BlackBerry (BlackBerry Stock Quote, Charts, News, Analysts, Financials TSX:BB) may have lost the use of their treasured keypad phones but shareholders can take a bit of comfort in BB’s share price, which finished 2021 up 40 per cent. 

But even that is a puzzling state of affairs, says Stephen Takacsy, chief investment officer and CEO of Lester Asset Management, who thinks that behind the stock’s gains, BlackBerry as a company is pretty dysfunctional.

“We did recommended it just over a year ago at $6, and then the Reddit crowd did us a huge favour and drove it up to over $20 and we sold our stock because it was just way above anything we dreamed of,” said Takacsy, speaking on BNN Bloomberg on Thursday.

“Blackberry has its problems,” he said.

Former phone maker BlackBerry announced earlier this month that devices running its legacy software would cease to function, ending an era that really finished about a decade ago with the rise of the iPhone. And while BlackBerry has farmed out its phone tech to a partner company looking to make a 5G mobile, BlackBerry as a company has definitely moved on, having remade itself as a software and security business.

That turnaround from hardware to software was labelled complete a few years ago, yet questions remain about the company’s ability to compete in the tough sectors of cybersecurity and autos, the latter being BB’s focus for its connected IoT tech. A downturn in the auto sector has impacted BlackBerry’s business with its QNX operating system, meanwhile the company paid big in 2019 to add US cybersecurity business Cylance to its stable of assets but that deal has yet to pay off for BlackBerry.

“That Cylance acquisition they made has been short of a disaster,” said Takacsy. “They almost wrote it off within 12 months of them buying it. They’re basically getting their lunch eaten by the likes of many of the other cybersecurity companies out there.”

“Their IP portfolio has been for sale for over a year now. We’ve heard that it’s been sold and there’s still no news,” he said. “And they’re having real trouble hanging on to some of their core business — I’m not talking about the physical phones but their enterprise security software business.”

“So, I don’t even know why the stock is at $11. It probably should have got back down,” he said.

BlackBerry got caught up in last year’s so-called meme stock phenomenon where retail investors used social media to rally around a few names and managed to pump up share prices to wildly inflated levels. In BlackBerry’s case, that meant taking the stock from around $8 at the start of January of last year to as high as $31.49 by the end of the month only to lose most of those gains over the ensuing weeks. Another wave came in late May/early June where the stock doubled from about $10 to $20 per share but it’s been a gradual downward slope since then, with BlackBerry currently trading around the $11 mark.

But Takacsy says BlackBerry’s troubles run deeper than last year’s retail investor revolution, hinting that CEO John Chen’s tenure at the top hasn’t been as beneficial to the company as it could have been.

“[BlackBerry stock] is not what I would touch,” said Takacsy. “I think it’s just sort of floating up there because of the meme stock [trend] and so it has a bit of an aura about it.”

“But in the corporate governance, in my opinion hasn’t been good,” he said. “We’ve seen some directors step down from some committees and we feel that it’s too much control in the in the hands of certain individuals.”

“I honestly wouldn’t buy it. It’s possible that the company gets sold one day for bit more than it’s trading at today, but there are a lot of problems going on in there and the pay package of the executives are just exorbitant, as well,” he said.

BlackBerry announced financial results last month for it third quarter fiscal 2022, ended November 30, 2021, showing revenue of $184 million compared to $218 million a year earlier but up slightly from the $175 million of the previous quarter. The company’s gross margin sank to 63.6 per cent compared to 64.0 per cent for the previous quarter and 68.3 per cent from a year ago while the company posted net income before income taxes of $76 million compared to a loss of $128 million a year earlier. BlackBerry’s revenue came from its Cybersecurity business at $128 million, $43 million from its IoT segment and $13 million from Licensing & Other revenue.

“This quarter BlackBerry delivered solid sequential billings and revenue growth for both the IoT and Cybersecurity businesses, beating expectations for the second consecutive quarter,” Chen said in a press release. “We also beat expectations on earnings despite the ongoing investment to drive future top line growth.”