I wrote on Monday about a Motley Fool Canada pitch for an Artificial Intelligence stock, and that tease pointed at one of two smallish tech companies from Canada’s Silicon Valley (Waterloo, Ontario)… I speculated that it was likely OpenText (OTEX) that Stock Advisor Canada was hinting at, given the clues dropped, but today we’ve got either a retraction or an addition to that tease to consider — I’ll let you decide which.
What does that mean? Mostly, just that there’s a new ad today, with a similar theme, that clearly points at the other company I considered.
How’s that for a tease?
Don’t worry, I’ll get to the details… but first, let’s see what the new ad says from the Motley Fool:
“This Tiny Company From Waterloo Just Bet $1.4 Billion on Artificial Intelligence…
“One of the biggest Canadian tech acquisitions of the year was just announced – and the details may shock you…
“… my jaw dropped when news broke of this $1.4 billion acquisition of a breakthrough artificial intelligence company from California.
“Because it was made by a Canadian company that no one on Bay Street is talking about…”
I kinda doubt that “no one on Bay Street” is talking about this stock, it’s been a much-debated company in Canada for decades now (“Bay Street” is the Toronto equivalent of “Wall Street”, for those of you new to Canadian punditry), but we’ll let that slide. What else?
“This monumental deal has yet to officially close – which means there may still be a little time for you to get in before this stock potentially skyrockets.
“Because when this acquisition becomes official, our analysts expect this little Waterloo company’s revenue to balloon… and the share price to soar along with it.”
And the Fool now says they’re offering up a “brand-new report” called “The Artificial Intelligence Arms Race: 1 TSX Stock Hiding in Plain Sight” that explains their investment thesis in this company. That’s a different offer, and an entirely different ad, than the one I covered on Monday… but still, the overall pitch is very similar, that this little Waterloo company is about to surprise everyone with its big strides in Artificial Intelligence.
The stock, however, is clearly different — the new addition of a $1.4 billion acquisition as a hint means that the Foolies today are pitching Blackberry (BB), the other company I considered as a near-match on Monday.
So is this a second AI teaser pitch, just trying to see which ad will get more subscribers? Just an update of their AI pitch with more detail? If the former, this is an additional recommendation — if the latter, it’s time for a retraction as we pull our “OpenText” answer and replace it with “Blackberry.”
And, frankly, I can’t tell you which it is — we do make a mistake about once a year, so I won’t pretend perfection (our standard is 99% accuracy in teaser answers, and we’ve beaten that standard for more than a decade… but I do get them wrong sometimes).
And more importantly, perhaps, we can tell you that Motley Fool’s Stock Advisor Canada has recommended both of these stocks — OpenText they seem to have recommended several years ago for the first time, and Blackberry more recently (likely within the past year). The Motley Fool also owns shares of both stocks… so when it comes down to your assessment, if you’re putting any weight on the Fool’s endorsement, you can still put a check mark next to both.
What does Blackberry look like right now? Well, the stock has had a notably bad year, it’s down almost 50% from its January highs thanks to falling revenue and earnings — though they have beaten analyst estimates for many quarters in a row now. It’s still very much a turnaround story, with hopes that their investments in QNX (self driving cars and car mobile security/infotainment systems) and other mobile security technologies will provide some positive momentum in the years to come, but it’s not yet a justifiable “earnings” story — if analysts are right, they’ll earn about 13 cent per share this year and 15 cents next year, which means the PE ratio is still around 50 and they’re growing revenues at only about 5% a year (maybe 10% now, with the new acquisition… but don’t write that in pen just yet).
And it is heavily owned by a few stock pickers that I respect — notably Prem Watsa’s Fairfax Financial (FRFHF), which has been a major shareholder of Blackberry for years as Watsa has bet heavily on a turnaround under CEO John Chen, and the very successful Primecap family of funds. I’ve got exposure through both of those investments (I have money invested with Primecap, and Fairfax is a major personal holding), and I also have a small position in some speculative Blackberry options… and yet, I’d still give the edge to OpenText as an appealing lower-risk investment at these prices. They don’t have the possible “turnaround” jolt potential of Blackberry, nor are they likely to post lights-out growth anytime soon, but they have much more appealing financials and a steady dividend and very reasonable valuation to calm the heart… and they’re just much larger and less volatile.
Will this latest $1.4 billion acquisition change that story? Well, it should bring some more revenue… this will be the first substantial revenue boost for Blackberry in almost a decade, they’re essentially spending $1.4 billion in cash to buy a company that will probably have about $200 million in revenue next year. Blackberry won’t be a “what will they do with the cash” company anymore, as had been the case for a couple years as investors speculate on how they’d handle their $2 billion or so in surplus cash on the balance sheet, but buying revenue and growth is a reasonable thing to do if they can integrate this acquisition and it continues to be a growing and attractive business under new ownership.
And at least some of the Motley Fool writers up north are clearly excited — the latest free article they posted on Blackberry, just yesterday, is titled “Blackberry is set for massive growth.”
What’s the stock they’re buying? It’s a cybersecurity company called Cylance that specializes in threat detection using artificial intelligence. Cylance has had truly extraordinary revenue growth (from a low base, to be fair) and was reportedly considering an IPO before making the deal with Blackberry. Revenue for the year was reported as being about $130 million back in June, and it was growing at well over 100% in 2017 and 90% in 2018, so it’s probably reasonable to pencil in something close to $200 million in revenue for next year.
So that’s meaningful — Blackberry’s margins will probably come down, since I’m sure Cylance is nowhere near as profitable as Blackberry’s legacy licensing businesses are, but that would bring Blackberry’s revenue up by about 20% over the current year’s top line, and that would be the first real boost in revenue for BB since 2011.
Will that change perceptions? Well, I’d guess that the 2020 revenue estimates will have to be raised a bit by analysts… though since FY2019 will see a drop in revenue by close to 10% from 2018, there are clearly other moving parts (that’s the fiscal year they’re about to complete, it ends in January — which is about when the Cylance deal is expected to close). I would be surprised if this does anything for earnings estimates, since Cylance is very likely unprofitable (if they were making money, an IPO would have been more appealing a few months ago… and I’m sure the profit would have been noted in the self-congratulatory press releases).
Analysts have been mixed on the deal so far, you can see a summary of some of their reaction in this article but the overall sentiment doesn’t seem to have shifted dramatically… revenue growth is nice after a long decline, but analysts were generally putting a target of $10-14 on the shares before and most of them didn’t really change that. The average analyst target is currently just under $12, with analysts pretty evenly balanced between “hold” and “buy” sentiment — “hold” is about as pessimistic as most mainstream analysts ever get, so if you want some reason for optimism in the shares it’s probably that any upside surprise brought on by Cylance or strength in their other businesses could snowball with analyst upgrades and generate some actual investor enthusiasm.
It probably won’t generate any dramatic earnings, though, not right away, so I’m guessing Blackberry investors will be better off with Cylance than they would have been with the $1.4 billion in cash, but they’ll also probably have to be patient as we continue to wait to see whether John Chen’s turnaround is actually going to work and let Blackberry build a new and profitable company for investors over the next few years. I don’t see any reason why you’d need to rush into the shares immediately, you can probably take your time and do your research, but we’ll see.
So… any thoughts? Let ’em fly with a comment below. Thanks for reading!
Disclosure: Among the investments noted above I own shares of Fairfax Financial and have money invested in PRIMECAP funds, as well as a far-out-of-the-money call option speculation on Blackberry (Jan. 2020 $20 call). I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.