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Investment thesis
BlackBerry Limited (NYSE:BB) has long been a battleground, with both passionate bulls and bears arguing their side. And he managed to assert himself for a long time.
But I I believe we have seen two events in the last few weeks that signal the beginning of the end of the bull thesis.
I recommend investors to call this investment for a day and save their capital.
Short Summary
In my previous analysis I said:
BlackBerry is a turnaround that is constantly in transition. And yet it rarely turns. BlackBerry has sold its prized patents to bolster its balance sheet with plenty of cash.
However, I would still like to point out that it is not worth investing more capital in this investment.
The author’s work on BB
To be clear, I was pessimistic about BlackBerry for a long time, and it took me a long time to be right. When investing, you not only have to be right with the idea, but you also have to be right on time.
And to be clear, my timing was actually wrong. But I believe things are now starting to develop that will lend credence to my pessimistic thesis.
Short term outlook
BlackBerry’s CEO is leaving the company. Whatever you can say about CEO John Chen, the fact is that he held this company together.
I realize that Chen is an extremely controversial figure, but if the new CEO takes over BlackBerry, I can’t imagine she can compete with Chen. Chen had an opportunity to bring his vision for BlackBerry to life. And I suspect that working with Chen would have been extremely motivating for his team. When the new CEO replaces him, it will be a lot of work for them to turn Chen’s vision into reality.
Sales growth rates are too unpredictable
BB sales growth rates
BlackBerry notes that revenue growth rates are expected to improve in the second half of 2024. However, the reason for this is simply that revenue growth rates were significantly negative in the same period last year, especially in the fourth quarter of fiscal 2023.
This company wants to present a vision of a long-term growth story with good prospects, but that’s not the point here. Instead, it’s a business that’s slowly shrinking and doing whatever it can to survive. And I think time is running out for BlackBerry.
Dangerous balance, a noose
Yesterday, BlackBerry announced that it had redeemed $365 million of notes, but still holds $150 million of convertible notes. In practice, this now means that Blackberry has net debt of $100 million.
Recall that the only reason BlackBerry was able to maintain its market valuation previously was because BlackBerry had a net cash balance.
Since this convertible note is now out of the money and the conversion price is $6 per share, compared to BlackBerry’s current share price, which is about $3.50, bondholders will want a restructuring.
Accordingly, both companies have agreed to give BlackBerry until May 2024 to figure out how BlackBerry will come up with the $150 million to relieve the debtors.
The timing is important here. Why? Because BlackBerry hopes to take its IoT business public in a separate IPO. We want to jump on the AI and IoT hype currently permeating the market and hope to achieve a very high valuation for this enticing business.
This will result in BlackBerry’s thriving cybersecurity business remaining tied up in debt. In other words, BlackBerry will sell its crown jewel to pay down the debt on its balance sheet in an effort to weather a worse outcome.
The conclusion
In summary, my pessimistic stance on BlackBerry’s prospects remains unchanged. The departure of CEO John Chen, a stabilizing force for the company, brings with it an element of uncertainty as the new leadership may struggle to maintain Chen’s vision.
BlackBerry’s optimistic forecasts for improved revenue growth rates in the second half of 2024 appear tenuous given its recent history of negative growth, suggesting a slow decline rather than a robust turnaround.
The company’s decision to redeem some notes but still hold $150 million in convertible notes reveals a dangerous balance sheet as BlackBerry moves from a net cash position to a net debt position.
The looming deadline to address that debt problem coincides with BlackBerry’s plan to take its IoT business public in a separate initial public offering, a move that could potentially see the company sacrifice its crown jewel to ease financial pressures.
The complicated dance with debt, coupled with unpredictable revenue growth, paints a precarious picture for BlackBerry’s future and reinforces my skepticism about the viability of this investment.
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