One of the 4 horsemen of the retail trading community

Company Background

BlackBerry Limited is a Canadian technology company, which was founded back in 1984, headquartered in the city of Waterloo. Once known as one of the most prominent smartphone brands in the world, specializing in secure communications and mobile productivity, and famous for the unique keyboards on most of its devices, the Blackberry of today is a completely different animal. After peaking as a smartphone manufacturer back in 2013 with over 85 million Blackberry users, the company started to lose its dominant position as a result of the upraise of the likes of iPhone and Android devices.

The company then made a meaningful turn and entered into the Cybersecurity space by setting out on a mission to become the world’s leading provider of end-to-end mobility solutions that are the most secure and trusted. Blackberry Limited now provides intelligent security software and services to enterprises and governments around the world. It secures more than 500 million endpoints and has more than 175 million cars on the road. Geographically it operates in North America, Europe, Middle East and Africa, and other regions. The re-invented cybersecurity software and services company provides devices and software platform for managing security, mobility and communications among hardware, programs, mobile apps and the Internet of Things. An important confirmation to the quality of BlackBerry’s products was the fact that the company’s Unified Endpoint Management system became the only unified endpoint management system to be included on Department of Defense Information Network (DoDIN) Approved Products List. Another major recognition for the company came with the received accreditation from the Canadian government for the BlackBerry SecuSUITE system.

Current position – Financial Performance & Future Growth prospects

The senior management of BlackBerry Limited understands that in this day and age the only way for you to stay relevant, especially in the Technology space is to invest in R&D. An interesting fact for the company is that it has 24% of its revenue invested in R&D, which in turn shows a high level of commitment by the senior management of the company and desire for growth. Furthermore, Blackberry continues to invest in developing its product portfolio and has furthered solidified its go-to-market strategy, through multiple strong partnerships, which are expected to drive long-term growth. With the remarkable increase of the number of smart devices in our everyday lives the company is in a great position to capitalize on the secular trend of securing and connecting endpoints. Blackberry Limited enables Enterprise of Things by providing the technology that allows endpoints to trust one another, communicate securely and maintain privacy. Solid software sales continue to aid the company while growth in the cybersecurity business is expected to continue to be a huge positive.

We believe that one of the most transformative and beneficial business segments for the company in the coming years from a growth standpoint is going to be the Internet of things. The work Blackberry is currently doing in that part of its business is expected to lay out a great foundation for the company to benefit from the future explosive growth in this space. In summary, the Internet of things (IoT) represents the network of physical objects—“things”—that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the Internet.

This is now possible as a result of the continuous technological evolution and the convergence of multiple technologies like real-time analytics, machine learning, commodity sensors, and embedded systems. Traditional fields of embedded systems, wireless sensor networks, control systems, automation (including home and building automation), and others all contribute to enabling the Internet of things. For IoT, the cybersecurity software and services company intend to drive healthy revenue growth and increase market share in the industry. At the same time, it intends to grow market share for BlackBerry Cylance, while improving profitability and optimizing its cash position. The acquisition of the California based Cylance, was one of the latest major corporate moves that Blackberry made. Cylance’s highly skilled cybersecurity workforce and market-leading portfolio of endpoint solutions are a strategic fit for Blackberry and complement its Unified Endpoint Management and QNX businesses.

As per the latest earnings report from Nov 30, 2020, BlackBerry had $223 million in cash and equivalents with $99 million of operating lease liabilities at the end of the period. This indicates that the company is definitely in a strong position to meet its debt obligations. BlackBerry currently has an extremely low debt-to-capital ratio of 0.19 compared with 0.2 of the industry. We at DowExperts, like looking at stocks with strong balance sheets and without huge debt burdens. While we definitely could not say that Blackberry’s balance sheet is our favourite one, the relatively low indebtedness levels of the company throughout its re-invention stage of the business was an initial point of interest for us.

BlackBerry reported solid third-quarter fiscal 2021 (ended Nov 30, 2020) results, with the bottom line beating the street’s estimate. The QNX design business is one of the big winners in addition to series of valuable cybersecurity partnerships. The company is also witnessing significant traction in the Spark business. Non-GAAP earnings came in at $11 million or 2 cents per share compared with $17 million or 3 cents per share in the year-ago quarter. As a result of the major challenges that have arisen from the COVID-19 pandemic, quarterly total GAAP revenues decreased to $218 million from $267 million in the last quarter on an YoY basis. While Software and Services revenues aggregated $162 million, Licensing contributed $56 million to total revenues. The company recorded significant progress in both the Government and Financial Services verticals within the Spark business. Non-GAAP revenues for the quarter were $224 million, which matched the consensus estimate.

Last quarter was also emblematic for BlackBerry as the company launched Cyber Suite, which combines industry leading EPP, EDR and MDR products. It delivers continuous authentication and the mobile threat defense capabilities and brings together the best of BlackBerry and Cylance technology.

BlackBerry leverages its extensive technology portfolio to offer best-in-class security, safety and reliability to enterprise customers in growing segments of the cybersecurity, connected transportation, healthcare, financial services and government markets. received accreditation from the government of Canada.

The company’s goal is to remain a leader in regulated industries and other core verticals by continuing to extend the functionality of its secure BlackBerry Spark software platform through organic investments as well as strategic acquisitions and partnerships. The company intends to drive revenue growth and achieve margins that are consistent with those of other enterprise software companies. By product and service type, Software and Services generated 74.3% of total GAAP revenues in third-quarter fiscal 2021 while Licensing contributed 25.7%.

What are the risks for the company?

Blackberry Limited has been facing a lot of macro-related risks as a result of the COVID-19 pandemic, thus during the last earnings call the company decided to not provide a detailed financial outlook for 2021, but to remain relatively neutral on its revenue and earnings growth forecast for the year. Furthermore, the company is facing increased levels of competition within the markets that it operates in from various different vendors. Some of the key performance and company related metrics that other companies compete with Blackberry on include: product features, relative price and performance, product quality and reliability, compatibility across ecosystems, service and support, and corporate reputation. BlackBerry’s top competitors include JAMF, MobileIron, Sony, Microsoft, Motorola Solutions and Everbridge.

Another major risk for the future growth of Blackberry Limited is associated with whether or not the company will manage to establish high levels of compatibility and interoperability of its products and services across the wide spectrum of the industry standards. The main reason for that comes from the fact that developing new technology is a rather complex, expensive and slow process especially when the development process involves multiple different operating platforms. While being one of the first players in the IoT space, could prove to be a very lucrative and successful long-term endeavor for the company, it also brings quite a lot of risks with itself as well. Blackberry Limited will most likely find itself in a position where it would be spending a lot in R&D costs, testing and manufacturing of new products without knowing whether or not the market will accept them.

Due to the heavy capital-intensive nature of the industry that the company operates in, things like very large capital investments for technologically obsolescent offerings and R&D expenses are something normal. The large fixed asset base of the company is another net negative for Blackberry from a purely financial standpoint as it brings huge depreciation charges, which the company needs to constantly try to overcome and outweigh.

What’s new?

At the end of 2020, Blackberry Limited struck 2 important for the future growth of the company deals.

In the period, November-December the company first announced its collaboration with the self-driving truck technology provider, “Plus”, to integrate its much-acclaimed QNX technology into the latter’s Class 8 self-driving trucks. “Plus” is the first automated truck developer to capitalize on the QNX software for its revolutionary autonomous driving systems. This was latter followed by an even bigger announcement in December, 2020 when Blackberry Limited shared the news of a multi-year agreement with Amazon Web Services, Inc. — the cloud computing platform of Amazon.com — for the development of a secure and intelligent connected vehicle software platform for in-vehicle applications.

Technical Analysis & Sentiment

By looking at the daily chart, we can see that the BB’s stock has been on quite the ride throughout the last 12 months, as it started 2020 with a price tag of around $7/share, which was then basically cut down in half during the brutal broad market selloff in March, caused by the COVID-19 breakout. What followed in the months after that was definitely interesting. The daily chart clearly shows the strong bullish rally that occurred in the 3-month period between April and June, taking the price from the March 19th lows of around $2.70 up to $5.90, thus representing an 118% increase in less than 3 months. The stock then established a 6-month long sideways channel between $5.90 on the upside and $4.50 on the downside. A major break to the upside occurred at the end of November when the company delivered a 300% positive EPS surprise and the stock shot higher in the aftermath, thus breaking the $6 resistance mark with a meaningful gap to the upside. BB’s stock reached a new 52-week high at around $9.70 in the beginning of December, 2020 before cooling off and finishing the year at around $6.70. So, as you can see BB has always been a relatively volatile stock with 15-30% price movements over few weeks being kind of normal. However, what ended up happening with BB and few other very speculative names across different industries throughout the month of January, 2021 will definitely remain as a historic development in the global financial markets.

We have been talking for months now about the fact that the retail trading force in the market has seen a remarkable increase in numbers, volumes and participants throughout the last 12 months and we have been warning about the potential long-term implications that this could have on the stability in the financial markets as well as on the overall respective volatility that we are seeing each and every day. Up until now, the retail trader as a market participant has never been able to affect the price movements in the market due to the insignificantly low amounts, sizes and volumes that he/she usually trades. However, this is no longer the case as the January retail trading frenzy in the stock market and the ridiculous volumes and price increases on stocks like Gamestop, AMC, Bed Bad & Beyond and Blackberry showed exactly how powerful retail traders could be if they act together in unison with one another.

The whole thing started with the creation of a thread on Reddit, called WallStreetBets (WSB), where retail traders got together and decided to start buying some of the most heavily shorted stocks out there in order to push the prices of these stocks higher and force the large hedge fund managers to start covering their SELL positions and thus effectively creating what is known in the market as a short-squeeze. Short-squeezes are nothing new in the market as we have plenty of examples from the past where traders were caught on the wrong side of a short position. What was new this time around though was that the short-squeeze was initiated by over 8.5 million retail traders communicating openly in the WSB group on Reddit, in a coordinated and organized effort in the market. While 1 retail trader is not powerful enough to move the market as a result of the low liquidity that he has access to, 8.5 million small accounts acting as one can easily become a formidable force in the market.

The retail push was so powerful that it caused Blackberry’s stock to move up from $6.50 up to almost $29, thus registering the staggering 346% increase in less than 2 weeks. However, BB’s case was actually one of the milder ones as stocks like AMC and Gamestop went up by 583% and 2758% respectively.

As you can understand, this bullish momentum could not have been kept on for very long as such massive short-term rallies are usually very vulnerable and fragile, which tends to lead to volatile reversals and strong and quick declines. Furthermore, let’s not forget that retail traders (non-professionals) are characterized as traders that usually have poor risk and money management skills and that are generally unable to control their emotions in the market, which is technically a recipe for disaster when working in such a volatile environment. Thus, we saw heavy retail buying interest across a wide range of prices for BB and all of the above-mentioned highly speculative stocks that were part of the massive short-squeeze that occurred in the market. The powerful fear of missing out (FOMO) phenomenon led uneducated traders and investors to pile on the long side of the trade disregarding important investment rules and concepts like capital allocation strategies, diversification, risk management etc. As a result, we saw strong bearish reversals across all of these stocks at the end of January and in the beginning of February. In the case of Blackbery Limited, the stock lost over 60% of its market cap in just 4 trading sessions, dropping from $29 all the way down to $11. While prices have somewhat normalized, we definitely don’t think that the retail driven volatility in the market is over, thus we would like take this opportunity to warn our followers to exercise extreme levels of caution in February. Any major rally for the stock into the $18-20 range will most likely be heavily sold, with a potential Double Top formation occurring on the Daily chart later in the month. The current price of $13/share is way too high and unjustified from a financial and business performance standpoint, thus investors need to be very careful with any long exposure that they have on the stock for now and should be looking for opportunities to book in any profits if they haven’t done so already.

The stock could be a great long-term high growth tech addition to almost any portfolio out there, as the company has many favorable trends and tailwinds that will continue to work in its favor for the foreseeable future. However, we advise our followers to use the current irrational market behavior by trying to take advantage of the heavily one-sided and over crowded retail long positioning in the stock right now and not to forget that BB was trading at $6.90/share just 4 weeks ago. One of the ways to exploit the current market irrationality is to wait for the next 20-30% decline in the stock’s price before initiating your long-term purchase of the stock. The preferred accumulation area for DowExperts is between the $7-$9 levels, where you could look to open your initial BUY positions on the stock.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals, the technicals and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether Blackberry Limited (BB) is a good stock to buy with respect to the current levels of the price and the future growth prospects, we have decided to analyze the performance of both the ROBT (First Trust Nasdaq Artificial Intelligence and Robotics ETF) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 89% 6-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty.

ROBT

ROBT tracks a modified equal-weighted index of all-cap, global companies involved in artificial intelligence or robotics. ROBT uses the Consumer Technology Association’s classification and rating system to select companies involved in artificial intelligence or robotics. The ETF has 109 individual holdings. Stocks are classified into one of three categories: enablers (companies in advance machinery, semiconductors, or databases used for machine learning), engagers (companies offering products, software, or systems), or enhancers (companies that do not have AI/Robotics as their core business but still provide value to the industry). Stocks are then ranked based on their level of involvement in the industry, and the index selects the top 30 companies within each category. Engagers receive 60% weight, enablers have 25%, and enhancers take 15% weight of the portfolio, holdings are equally weighted within the categories. The index is rebalanced quarterly and reconstituted semi-annually.

Blackberry Limited (BB) represents the largest holding of the ROBT ETF with a 3.30% weight, which makes it a very influential stock for the general direction of the ETF.

The technical picture on the daily chart for the ROBT ETF shows a significant over-extension to the upside as the ETF has nearly doubled from the levels that it was sitting at last October. The upward sloping diagonal uptrend resistance capped the most recent rally at the end of January when the ETF was rejected around the $58 all-time highs. Following the decline towards $53 the price has been trying to rebound and stage a comeback, but the volume and the relative strength of this move have been quite weak, which in turn should be a warning sign for the bulls. The RSI is also about to confirm a strong divergence on the Daily chart. We are currently observing a very interesting and dangerous pattern occurring in the market, while the number of market uncertainties continues to rise we are seeing the general level of complacency among most of the market participants also rising. This could be easily seen in the increased borrowing of the cheap credit that central banks provide as well as in the heavily inflated prices of financial assets. It seems that everybody has this intrinsic belief that nothing bad can happen for as long as the Fed continues to print more money, thus keeping the liquidity in the market flowing. However, this sounds troubling as basically that is exactly what the definition of a bubble states. One of the most successful investors of the last century, George Soros defines what a “bubble” is with the following statement – “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend.”. In our current economic environment, the underlying trend is the worsened economic environment as a result of COVID-19 and the misconception related to that trend is that the Federal Reserve can print us out of problem. This is a dangerous game and ETFs like ROBT could be exposed the most to a potential strong reversal as a result of the nature of the companies that are part of the ETF – highly innovative, financially unstable and sometimes speculative forward looking tech companies aiming to disrupt the world with their products and services. With that being said, we want to clarify that we are not bearish on the ETF in the long-term but we are informing you that if a broad market downturn occurs, ETFs like ROBT will be hit the hardest.

Our downside targets for the ETF are $48 and $42 respectively, where we expect ROBT to find a lot of buying interest, which in turn will result in the resumption of the long-term bullish trend.

XLK

XLK tracks an index of S&P 500 technology stocks. XLK was the first to launch in this space, as such it offers a more narrow focus on the US technology segment. Its S&P 500-only portfolio tilts away from our segment benchmark. XLK is heavily concentrated and also a few that seem like misfits, such as financial payment processers or telecom firms. Its limited selection universe excludes small-caps and most midcaps. Avoiding smaller, less-stable firms results in lower volatility and a tilt toward value compared to our broad tech-industry benchmark index, and can cause other minor performance differences. XLK held the title for a long time as the cheapest and the largest fund in its segment.

It is important to note that the Technology sector has been the sector that has attracted the largest capital inflows in the last 12 months as a result of its remarkable performance and the new all-time highs that it set on multiple occassions. The XLK was trading down around the $70 levels in March, whereas back in September it hit a new all-time high around $135. This represented a mind-blowing 92.8% appreciation the last 10 months. Some of the largest companies in the Technology sector are Apple, Microsoft, NVIDIA, Adobe, Salesforce, which have also been among the biggest winners so far this year. However, also lets not forget that these companies and their respective products and services that they offer were very well positioned to benefit from the newly established stay-at-home economy. Thus, the gains in their respective stock prices have been backed up by solid company performance numbers and favorable business trends.

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 3 months taking the price from the October 30th lows of around $110 to the $135 all-time highs registered in the beginning of February. Throughout this most recent strong 22.7% rise of the ETF we have observed a consistent weakening of the bullish momentum, clearly portrayed by the lower highs put in by the RSI, thus creating a strong daily divergence between the price and RSI charts. This could easily be considered as an important warning sign for the bulls and that they might want to start booking some profits at the current all-time high levels. All US indices and ETFs are heavily overstretched to the upside and there is way too much uncertainty out there when it comes to how exactly will the COVID-19 pandemic play out in the coming weeks, as new and more contagious strains of the virus continue to emerge in different parts of the world. Furthermore, it is still not absolutely clear how efficient are the current vaccines in treating the new strains. This could potentially be a huge risk for the markets as the strict lock-down measures are expected to be lifted in the coming weeks and months as the general idea circulating in the media is that things are gradually improving now with the vaccines being distributed globally. However, things might not be as straightforward and further complications could arise as a result of the mutation of the virus, which could in turn have a devastating impact on the global financial markets. Most market participants look very complacent at the moment, with full and blind confidence in the power of the central banks to print their way out of this economic recession. However, as financial professionals with decades of actual market experience we know that this is simply not possible as you can’t print out growth, consumer spending, job creating, productivity etc.

The XLK ETF has been flirting with the diagonal upward sloping resistance and has seen many short-term rejections throughout the last few weeks, signaling for the fading bullish momentum that we discussed already. The current immediate resistance lies at $137, where the price will face major headwinds for its future appreciation. However, the strong round psychological resistance at $140 is expected to provide short to mid-term cap on any bullish rallies, as we expect to see the ETF moving lower in the coming weeks, before resuming its long-term bullish rally. Our downside targets will be placed at $124 and $112 respectively. Two consecutive breaks of the above-mentioned support zones would open the door for a move lower towards the strong horizontal support lying at around the $100 mark.

Conclusion

After analyzing carefully both the fundamental and technical picture for Blackberry Limited, we conclude that the stock could be a good long-term, tech oriented and high-growth addition to any forward-looking investment portfolio if purchased at the right price. Our individual stock analysis showed that another major move lower could be expected in the coming weeks, as a result of the high volatility in the market at the moment, primarily caused by the retail trading community. However, we at DowExperts always look at our specifically designed and built correlation confirmation matrix in order to either confirm or reject the findings of the individual stock analysis. What we found after looking at the ROBT and XLK ETFs is that they are also signaling for a potential pullback in the coming weeks. This gave us further confirmation for our prior findings and solidified our short-term bearish view on BB. The recommended accumulation (buy) zone for any tech-oriented long-term investors would be around $7-$9/share. If you purchase the stock at a higher level, you would be paying a premium for BB, that is currently unjustified and unwarranted. We believe that a purchase within the above-mentioned accumulation zone, could bring anywhere between 40-60% return within a 6-8 month period.


Sincerely,

This image has an empty alt attribute; its file name is logo.svg

Add a comment