On May 10, BlackBerry (NYSE:BB) filed its 2020 proxy statement with the Securities and Exchange Commission (SEC). It showed that the company’s second-largest shareholder, Canada’s Fairfax Financial (OTCMKTS:FRFHF), hadn’t sold a single share of BB stock over the past year.
Up 189% over the past 52 weeks, in part, to it becoming a favorite “meme” stock.
I have to wonder if Fairfax CEO Prem Watsa will continue to hold its 46.7 million shares, good for 8.25% ownership of BlackBerry stock, or will he opt to reduce further his company’s position in the Canadian tech company.
I’ll look at both sides of the argument.
BB Stock Has Come a Long Way
At one brief moment in late January, BlackBerry’s shares were trading at a 52-week high of $28.77. BB stock hadn’t traded at this level since September 2011, almost a decade ago. In a brief span of 5 days, its share price jumped 83%.
Trading got so crazy over those five days that BlackBerry was forced to issue a statement that it knew of no reason why its shares were bolting higher. By the end of March, it was back in single digits.
Its share price spent two months bouncing between $8 and $9 before crossing back into double digits at the end of May. It’s trading at around $13 this morning.
Another surge like January’s should give Watsa reason to consider selling some more BlackBerry stock. As it stands now, Fairfax is sitting on a nice profit on its remaining shares.
According to its Q1 2021 quarterly report, BlackBerry shares had a carrying value of $298 million as of Dec. 31, 2020, or $6.63 per share. That’s a 120% unrealized gain.
Where it gets confusing is that BlackBerry’s Q1 2021 report says it owned 44.9 million shares at the end of 2020, 1.8 million less than in BlackBerry’s 2020 proxy statement.
Whatever the amount, InvestorPlace’s Larry Ramer believes that the latest move to double digits was a combination of retail and institutional buying. Ramer believes that BlackBerry has several things going for it that should keep its shares higher over the next six months.
My colleague points out that Gateway, the company’s network security product that allows remote employees to connect to their company’s network securely, ought to be a big revenue generator in the future.
As a Canadian, I appreciate Ramer’s confidence in BlackBerry. The company’s taken it on the chin in recent years as it transforms into a software company. While not there just yet, there are signs it’s making progress.
BlackBerry Still Loses Money
The company reported its Q4 2021. Revenues for the year fell 16.4% to $919 million with non-GAAP adjusted net income of $101 million or 18 cents a share. That’s up from 13 cents a year earlier.
However, it lost $1.10 billion on a GAAP basis, almost 10 times its 2020 loss of $152 million. But hey, that’s not nearly as good a story to tell as a 38% increase in profits year-over-year. Eventually, all non-GAAP numbers have to be put aside. GAAP accounting exists for a reason.
Alex Sirois is one of the few InvestorPlace writers that isn’t keen on BB stock. He recently discussed some reasons why.
First, he points out that the stock has a short interest of 9%, less than half the amount for GameStop (NYSE:GME). This means the likelihood of a short squeeze is unlikely compared to GME.
Secondly, he argued that the company’s position within the automotive sector is less about leading the tech sector and more about being a part of a very trendy marketplace.
For me, the problem isn’t the company grasping at straws. Rather, I believe it’s got a ridiculous valuation.
In fiscal 2021 (Feb 28 year-end), it generated $40 million in free cash flow (FCF). BlackBerry’s current market capitalization is $8.06 billion. This means the company’s FCF yield is 0.5%. Inversely, its market cap is 200x FCF.
For a much more reasonable valuation, investors can own NortonLifeLock (NASDAQ:NLOK) for an FCF yield of 4.3% based on a trailing 12-month FCF of $700 million and a market cap of $16.37 billion.
The Bottom Line
In September 2020, Fairfax acquired 90% of the private placement BlackBerry sold of 1.75% unsecured subordinated convertible debentures due Nov. 13, 2023. The $330 million in convertible debentures gave Fairfax the right to convert them into 55 million common shares priced at $6.00.
Those are now worth more than double. Fairfax is sitting on an unrealized gain of more than $470 million in just nine months.
However, Watsa stated in its Q1 2021 letter to shareholders, “We continue to back John [Chen], as we extended the maturity of $323 million of our convertible debentures acquired in 2013 to 2023 with a reduced conversion price of $6 per share.”
It would be quite a change of opinion to turn around and sell those shares.
While I wouldn’t own BlackBerry stock, Watsa seems more than willing to ride BlackBerry’s momentum a little longer.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
