BlackBerry is getting leaner, but is it meaner? Don’t hold your breath

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BlackBerry Ltd. hasn’t enticed investors for years, and its deal to sell its patents for US$600-million – making it a more streamlined business focused on cybersecurity and vehicle operating systems – is a weak reason to pay attention now.

Once called Research In Motion and best known for its wireless communication devices, BlackBerry has struggled to gain attention in the stock market over the past decade, other than a fleeting interest last year as a so-called meme stock hailed by speculating retail investors.

The price jumped in January, 2021, and again in June, on exceptionally high trading volume – but the rally lasted just long enough for some institutional investors to cash out on their good luck.

On Monday, the stock closed at US$8.23 in New York, up 4.4 per cent. But serious investors may be slow to give the stock another look, and it’s hard to blame them.

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The share price has sagged more than 40 per cent over the past 10 years. And it has fallen about 94 per cent since mid-2008, about a year after the introduction of Apple Inc.’s iPhone but before the new competitor had gained significant traction in the eyes of BlackBerry stalwarts.

Even analysts, often a bullish group in terms of their recommendations and target prices, have been mostly voicing opinions perhaps best summarized as: Why bother?

Among the 11 analysts covering the stock, just one recommends it as a “buy.” The recommendations from the other 10 are variations on “hold” and “sell,” offering rare bearish consensus on Bay Street and Wall Street.

Monday’s patent sale announcement, which had been widely expected, did not lift the mood.

Paul Steep, an analyst at Scotia Capital, lowered his target price – or the price at which he expects the shares to trade within 12 months – to US$6.50 from US$7.50 previously, to reflect the lost business line. That’s about 20 per cent below the stock’s current price in New York, underscoring the analyst’s “sector underperform” recommendation, which is the equivalent of sell.

“We would need to see a material improvement in the firm’s performance within its software businesses to become more constructive on the shares,” Mr. Steep said in a note.

BlackBerry stopped making smartphones years ago, and stopped supporting the software on existing devices earlier this year. But the company generated US$184-million in revenue in its fiscal third quarter ended Nov. 30.

Patent licensing, which can be inconsistent from quarter to quarter – and is now being jettisoned – generated revenue of just US$13-million during the quarter. Cybersecurity and vehicle operating systems generated a combined US$171-million in revenue or 93 per cent of the total.

This is where the company has pinned its hopes, and there are encouraging signs of success.

It struck agreements in the third quarter with BMW Group and Mahindra & Mahindra Ltd., the Indian auto maker. Though vehicle sales are being thwarted during the pandemic, which is a global challenge, BlackBerry’s revenue from vehicle operating systems nonetheless increased by 34 per cent, year over year. Auto production should recover as supply chain issues recede.

What’s more, the patent sale means that the company is less exposed to non-recurring revenues, which is a good thing when valuing a stock. It also simplifies BlackBerry’s business to essentially two pillars. The sale will raise the company’s net cash to an estimated US$1.15-billion, according to Mr. Steep, giving it the opportunity to invest in both of them.

The problem is that BlackBerry is hardly enjoying unfettered success, especially in its cybersecurity business where it faces aggressive competition from the likes of CrowdStrike Holdings Inc. – arguably leaving the vehicle operating system, known as QNX, as the only bright spot.

“There is definitely value there, but the rest has been very disappointing. It’s really a name we are not looking at any more,” Stephen Takacsy, chief executive officer at Montreal-based Lester Asset Management, said in an interview.

With trading volumes a fraction of what they were during last year’s brief rallies, it appears as though even meme-stock investors have lost interest.

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