BlackBerry (TSX:BB) stock fell 19% to $3.92 in the fourth week of January after the company announced raising $175 million through a private offering of convertible unsecured debentures. Is this a market overreaction creating an opportunity to buy the stock or a warning to avoid this stock? Let’s find out.
Market reacts to BlackBerry’s convertible unsecured debentures issue
BlackBerry issued a convertible debenture at a 3% coupon and a $3.88 conversion price maturing on February 15, 2029. It means the company will pay a 3% annual interest on the $175 million debt raised for the next five years. On maturity, the debenture holder will have the option to take the principal amount or shares worth the invested amount at $3.88 per share. This maturity will dilute the shareholding of BlackBerry shareholders.
But that is only half the information on which investors panicked and thought BlackBerry was raising debt and diluting shareholding.
BlackBerry will use the $175 million proceeds to repay its $160 million 1.75% convertible debenture maturing on February 15. These debenture holders cannot convert their debenture into shares if the company repays the debenture before maturity. The company is merely extending the 2024 debt to 2029. However, it will pay a higher interest, increasing its interest expense.
Even though BlackBerry has been generating losses for several years, it has $271 million in cash reserves, sufficient to fund four to five years of losses. The company extended its debentures before. But investors reacted now and pulled the stock price down to the convertible price. It might probably repay this debenture before maturity to preserve shareholder value.
Why are BlackBerry shareholders overreacting?
In October 2023, BlackBerry announced plans to spin off its Internet of Things (IoT) business. That would mean BlackBerry would have two shares on the exchange, one for cybersecurity and one for IoT. The idea was to give shareholders more value, as IoT has strong growth while cybersecurity has more profit. However, this news was not taken well by shareholders, as the combination of IoT and cybersecurity kept revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) positive.
In December, BlackBerry announced a leadership change, sending the stock down another 26%. BlackBerry’s Cybersecurity president John Gamatteo replaced John Chen as chief executive officer (CEO) on December 11. Investors trust the leadership, and a management change negatively impacts the stock at the initial stage as the new leader is yet to show results. Bombardier’s leadership change in the spring of 2020 was also taken negatively, but the pandemic was a major contributor to the dip in the management change.
BlackBerry’s revenue has been falling from $1 billion in 2019 to $656 million in 2022. Behind these declines were delays in government contracts for cybersecurity and the automotive supply chain crisis that stalled new order volume. However, this trend is likely to reverse as the 2023 revenue is likely to surpass $830 million.
Moreover, the new CEO has reversed the decision to spin off the IoT business with a subsidiary IPO (initial public offering). Instead, the company will separate the IoT and Cybersecurity business, but they will keep trading under BlackBerry.
Should you buy the dip or call it a pass?
BlackBerry has the potential to grow with its QNX and IVY offerings that cater to IoT security. But it is a crowded space, and the need of the hour is investor confidence. The company has sufficient cash reserves to withstand slow periods of growth and recession. What is awaited is the rally. Investors are getting anxious to see the stalled sales of QNX, IVY, and cybersecurity pick up.
If you are willing to take risks, BlackBerry could be a stock worth buying now while it is at its 20-year low. The stock seems to have bottomed out. The next big movement in the stock will likely happen in its fourth-quarter earnings. Hopefully, the new CEO can turn around the stock by making BlackBerry efficient and grabbing more deals. If you are willing to take risks, it could be the next turnaround story.
