John Chen’s turnaround plan for BlackBerry Ltd. just got a reality check.
Shares of the company, which had surged 54 percent under Chen’s leadership this year, slumped the most since November yesterday after Apple Inc. and International Business Machines Corp. unveiled a pact to collaborate on business services.
The deal puts BlackBerry’s nascent recovery at risk by encroaching on a key component of the new chief executive officer’s overhaul: shifting the company from flagging smartphone sales toward software-based services for corporations, which generate higher margins.
“You’ve got quite a few bigger enterprise entities now vying in the space where BlackBerry dominated,” Amitabh Passi, a San Francisco-based analyst at UBS Securities LLC, said by phone yesterday. He listed U.S.-based companies VMware Inc. and Citrix Systems Inc. as challengers and questioned whether Google Inc. and Microsoft Corp. will intensify their efforts on business services too. “It changes the competitive dynamic.”
Since taking over as CEO in November, Chen had been winning over investors with a turnaround strategy that has included cutting costs, selling most of the company’s property in Canada, and building revenue in business services and its BBM instant messaging service to compensate for declining handset sales.
The Waterloo, Ontario-based smartphone maker reported an adjusted loss of 11 cents a share in its fiscal first quarter on June 19, ahead of the analysts’ average forecast of a 25-cent loss.
“Right now, everything that I’m doing is judiciously starting to lay the groundwork for revenue growth for next year,” the 59-year-old Chen said in a conference call at the time. The odds of a turnaround are 80-20, up from a previous prognosis of 50-50, Chen said in May.
The stock had responded positively, with the U.S.-listed shares nearly doubling through yesterday since a low in December. Shares sold short on the stock dropped to 24.3 million as of July 16, the lowest level since 2012, compared with 63.5 million in March 2013, according to data compiled by Markit Ltd.
Options traders had also been betting Chen’s strategy would lead to further gains in the stock.
One-month put options calling for the stock to drop 10 percent cost 5.2 points less than calls betting on a 10 percent gain on July 7, the biggest spread ever for the price relationship known as skew, according to data compiled by Bloomberg.
Seven of the 10 contracts with the highest ownership are bullish, and January $10 calls have the highest open interest, data show.
The rally came to a halt yesterday, with the stock tumbling 12 percent in New York to close at $9.97. It dropped another 2.6 percent to $9.71 in New York today.
The Apple-IBM deal announced July 15 is designed to get more iPhones and iPads into corporate hands and more IBM services such as analytics, data storage and supply-chain management onto mobile devices. The companies will also create industry applications.
“You can’t provide apps without a secure infrastructure underneath,” Passi at UBS said.
BlackBerry is a “clear leader” in the business market with the most secure devices, software, servers and network, Lisette Kwong, a spokeswoman for BlackBerry, said yesterday.
“Enterprises should think twice about relying on any solution built on the foundation of a consumer technology that lacks the proven security benefits that BlackBerry has always delivered,” Kwong said in an e-mail.
“Short sellers may re-initiate positions in BlackBerry,” said John Stephenson, CEO at Stephenson & Co. Capital Management Inc., in an e-mail. “I view this as an incremental negative. Much of the easy lifting has been done in real estate sales and tax credits. Also, after the run that the stock has had, many investors are looking to take money off the table.”
BlackBerry may have trouble keeping up technologically with Apple while keeping its services affordable, Stephenson said.
“Many firms are abandoning the BlackBerry platform as the cost of the server is just too great,” he said. “BlackBerry has the better corporate security, although Apple’s iPhone 5S has biometrics, which helps close that gap.”
Still, Apple and IBM have to prove they can develop products together and win over business customers.
While their alliance is “incrementally concerning” for BlackBerry, there aren’t enough specifics about the pact at this stage to really judge the threat it poses, Passi said.
Luciano Orengo, a fund manager at Manulife Asset Management Ltd. in Toronto, sold his positions in BlackBerry several years ago as the company’s earnings deteriorated. The recent rally in shares doesn’t pique his interest. Unlike cyclical stocks such as commodities producers, technology companies that fall behind tend to stay behind and ultimately disappear, he said.
“BlackBerry is a company that’s slowly dying, and today’s news that Apple and IBM are partnering on the business side is another drop into the negative bucket,” he said. His firm manages about C$292 billion ($272 billion). “Technology is a treadmill. You have to keep innovating, keep growing share. I can’t look at that company and three years from now tell you whether it’ll be here or not.”