KeyStone’s Stock Talk Podcast Episode 127
This week, our YSOT segment is on BlackBerry Limited (BB: TSX), the former undisputed heavyweight of the smartphone market, which is continuing its transformation into a provider of business security and information integration services. The stock surged over 50% at one point today on a deal with Amazon’s AWS. Is it hype or justifiable? Our Dog of the Week is Sona Nanotech Inc. (SONA:CSE), a Life Sciences company with the goal of developing and producing its own lateral flow rapid COVID-19 antigen tests. The stock, a market darling earlier in the year, is down over 92% from its highs, and 62% this week alone. We reviewed it earlier in the year in the $2.00-$2.50 range and with zero sales and only a small chance of actually selling its test kits in a tight time frame, we saw no serious investment merit long-term in the stock. With Sona cut in half, we take a look at the business once again. Our Star of the Week is Sierra Wireless (SW:TSX), an embattled Canadian-based technology company which has rebranded itself as an IoT (or Internet of Things) service provider. The stock, which has had a rough ride over the past 3-years after peaking in the summer of 2017 in the $40 range, was up 32% this week. We investigate what is driving the uptick.
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What does the company do?
BlackBerry Limited (BB: TSX)
Current Price: $9.50
Market Cap: $5.25 Billion
What does the company do?
If we flash back 10 years ago to when Brennan was in high school – Blackerry was undisputed heavyweight of the smartphone market, BBM was everywhere and anyone who was anyone, had a Crackberry. If we go back to when me an Aaron were in high school, the cup and string was just being introduced and dinosaurs still walked the earth, but that is a story for another day. Fast forward to today, and Blackberry boasts just over 3 users the two founders, and their mom. Suffice it to say, BlackBerry is a very different company. The former undisputed heavyweight of the smartphone market, has transformed itself into a provider of business security and information integration services.
Driving the stock today: BlackBerry shares shot up over 50% in early trading this Tuesday on news that the company will partner with Amazon Web Services to jointly develop and market its vehicle data integration and monitoring platform, IVY. The IVY software system can run inside a vehicle’s embedded systems, but configured from the cloud to let automakers providers drivers with features that can include indications about road conditions, driver performance, or battery use for electric vehicles.
The companies first announced a collaboration in the pre-pandemic January of 2020 when BlackBerry said it would collaborate with AWS on connected vehicle safety and security services for in-vehicle applications.
Around 175 million vehicles are already using BlackBerry and AWS-enabled QNX service, which was first launched five years ago.
Great news today, but BlackBerry has been firmly in this business for 5-years – has it translated to meaningful results?
Recent Financial Results:
Revenue increase 2% in the quarter, but was down for the year. Operationally the business remained at a loss.
It has a good balance sheet with a solid net cash position but over the first six-months of this year it has created no cash flow once again.
The news out today was a positive for BlackBerry, but does it justify a 50% jump. In our opinion, not by a long shot.
Until once of BlackBerry’s promising announcements starts to turn into meaningful cash flow and revenue gains the business will continue to be dead money and not a smart investment.
The stock remains down massively over the past 10 years, down over the past 5 years and roughly flat in the past year. Why? Because, despite all the promises of a turnaround and flashy annual announcements – there remains declining or flat revenues over this period, zero cash flow growth and the stock still trades at high valuations relative to adjusted EBITDA – in the range of 40. BlackBerry was a great Canadian success story, but the turnaround has been more talk than action so far.
Sierra Wireless Inc. (SW: TSX)
Current Price: $19.50
Market Cap: $710 Million
What does the company do?
Sierra Wireless refers to itself as an IoT (or Internet of Things) service provider. The company actually operates through two business segments: Internet of Things solutions and Embedded broadband. Approximately 70% of revenue was from the IoT segment in 2019.
Sierra’s stock has had a strong run over the last week up 32%.
Looking at the recent news flow, the company reported on November 18th that it had completed the sale of its Automotive Embedded Module Product line for a price of US$165 million.
The company says that the divesture enables it to strength focus on its IoT segment which produces recurring revenue. The sale also adds to Sierra’s financial strength and allows it to expand its portfolio of IoT solutions and new 5G modules.
Clearly, Sierra is focused on growth in the very exciting IoT space and this transaction help it to further pursue that strategy.
The Q3 report was released on November 12th.
- Revenue, including the Automotive Business, was $180.3 million compared to $174.0 million in the third quarter of 2019, an increase of 3.6%.
- Revenue, excluding the Automotive Business, was $113.4 million, a decline of 17% compared to last year and a quarter over quarter increase of 1.5%.
- Adjusted EBITDA was a loss of $7.4 million compared to earnings of $3.5 million in the third quarter of 2019.
- Net loss from continuing operations was $12.0 million, or loss of $0.33 per share, compared to $0.3 million, or loss of $0.01 per share, in the third quarter of 2019.
- The balance sheet looked in good condition at the end of Q3 with $60 million in cash and about $50 million in debt. The cash balance will improve post sale of the Automotive business.
IoT is an exciting theme and we have covered it many times at our DIY investing seminar. However, whenever we discuss investing opportunities in exiting themes and industries, we always advise investors to be careful not to compromise fundamental investing principles.
There may to be a solid opportunity for Sierra now that it has a major inflow of cash from this sale. That said, the current financial performance and condition of the company do not warrant a recommendation from KeyStone.
Sierra lacks both profitability and revenue growth. To us, this means that the company’s strategy is still unproven.
We would consider Sierra to be high risk that we think that there are better companies to invest in that will provide access to exciting themes such as IoT.
Sona Nanotech Inc. (SONA:CSE)
Current Price: $1.10
Market Cap: $67 Million
What does the company do?
Sona Nanotech Inc. is in the Life Sciences Industry with the primary objective to develop and produce its own lateral flow rapid COVID-19 antigen tests utilizing Sona’s gold nanotechnology, which is supposed to increase performance and reduce the time to market.
We actually covered SONA on the podcast as a Star back in April when the stock made its ascent from $0.20 to over $2.00. And at that time, we highlighted SONA as something that was very risky, that had no proof of concept and probably something to avoid. And we came to this conclusion as the company had no sales, was trading with a market cap of over $100 million, and there was no indication as to whether the test would gain approval and be sold to the market.
But following our analysis, the stock continued to perform very well, running all the way to $15.00 – fuelled by speculation that these tests would be revolutionary to the market and were on the cusp of mass distribution.
But now 5-months since the stock erupted to (what we believed to be) unjustifiable heights, is now down over 92% from its highs, and is down 62% this week alone.
What is driving the stock?
Now why did the stock plummet from its highs?
Well, first off, the speculation and hype started to fade as Sona waited to receive its test results, all while Canada and the rest of the world utilized proven test kits for COVID-19.
With the biggest blow to the stock taking place on October 29th, when the FDA deprioritized the company’s request for an emergency use authorization for the marketing of its COVID-19 tests. Stating that the public health did not need the product in the U.S.
The second blow took place on November 25th when SONA withdrew its application for an Interim Order authorization (“IO”) from Health Canada for the marketing of its rapid, COVID-19 antigen test in order to obtain more clinical data to augment its submission.
So, by getting declined by the FDA in the U.S. and withdrawing its application to obtain more clinical data with Health Canada, the market understood that 9-months into the pandemic and SONA’s rapid antigen COVID-19 test kits had little chance of entering the marketplace anytime soon.
Financial Results (Q3, 2020)
- Revenue is still non-existent from when we last looked at the company.
- Net loss of $1.7 million for the quarter.
- The company has net debt of over $390,000.
So not very pretty and I would expect some more dilution in the future to keep the lights on.
Now to conclude – the stock did have both an impressive run up and ultimate downfall in a very short period of time. But I believe the key takeaway here is that although SONA excelled in the short run from speculation, it was essentially impossible to gauge a value on the stock, as it had no earnings, or even sales. So, it was impossible to assess whether we were receiving a decent price at $2.00 or it was becoming overvalued at $15… there was just really nothing to rely on and to indicate to investors a time to buy or a time to sell.
Now you may hit one, or two of these stocks in your life and get out at the right time. But if you add 10-15 stocks with this type of profile to your portfolio, you’re most likely going to lose in the long run.