BlackBerry 10

We’ve had a busy week!  Kevin and team are setup in NYC covering all of the launch stuff in the US.  And from the financial side, there have been a few research reports issued that are worth discussing.

Earlier in the week we had Ehud Gelblum from Morgan Stanley (MS) upgrade the stock to “overweight”, which is equivalent to a buy recommendation at other shops.  He raised his target price from $10 to $22.  A CrackBerry reader was kind enough to email me the full PDF (thanks Antoine!) so I’ve had a chance to look it over. 

It’s notable that the MS upgrade is a two-step recommendation change.  These are rare.  They took their recommendation from the equivalent of sell to buy.  Usually analysts move in one step increments, i.e. from sell to hold, and then from hold to buy once they get more comfortable.  But hold recommendations are viewed as not actionable on Wall Street.  So we have a major equity research shop in the US doing a two-step upgrade days before the US Z10 launch.  Cool.

Why the upgrade?  Gelblum now sees the BlackBerry 10 expanding the company’s average selling price (for devices) and gross margin.  He points out that this expansion  happens despite what we call a lower “attach rate” for service revenue.  Remember that BlackBerry 10 doesn’t come with the same juicy service revenue, so if the mix of devices shifts towards BlackBerry 10 then less customers are “attached” to this service revenue generating machine from “The Ghost of RIM Past”.

Gelblum sees Fiscal 2014 gross margin at 34%, versus the Street consensus of 30%.  That’s a big difference, too.  And I think he’s right.  Why?  A lot of analysts are modeling $500 ASP for the Z10 but I’m now told from a pretty good source that it’s actually over $550.  I’m sure it will drop every quarter, but starting at $550+ is a great sign, and gives BlackBerry a nice jump in gross margins right off the launch.  Well, ok, not right off the launch because of the staggered global launch.  But you know what I mean.

How is the analyst thinking about service revenue?  He’s modeling only half of BlackBerry 10 devices to be attached to a mobile device management (MDM) service, with an assumed $3/month fee for these users, which he notes is about half of what competing MDM companies charge.  In a nutshell, he’s laying out what he suggests could be a conservative estimate.  Analysts who upgrade a stock like to leave themselves some room to raise numbers later, should their thesis pan out. 

Much has been written that Morgan Stanley still doesn’t see BlackBerry as a strong #3 player.  They don’t see the BB10 getting much business from Android or iOS users.  This is exactly what is written in the report, but let me add some context.  He’s saying this to emphasize the limited downside risk in BlackBerry stock. 

Gelblum is essentially saying, “Listen I’m upgrading the stock here big time.  But it’s not because I suddenly think these guys are going to kick everyone else’s ass.  I’m upgrading because I think the BB6/7 fan base will buy these new devices, and the profit from those sales is actually meaningful.  BlackBerry can actually sustain itself as a niche midrange player”.

That’s the way I read the report.  And I’ve read a lot of these reports.

My thoughts?  Obviously we know quite a few iOS and Android users have been making the switch back to BlackBerry base on executive comments so far.  I think Wall Street isn’t willing to fully believe this yet, but they’re paying close attention.  Maybe the return to BlackBerry is a short term thing, where those who previously left had been dying to come back.  If that’s the case, then the MS report is an accurate reflection of things.  But what if the Android and iOS defections continue?  BlackBerry has a LOT of room to increase US market share here.  They only need a little bit to make a big difference in their financials. 

Alright - enough about the Morgan Stanley report.  There are two others I want to mention here.

Cormark analyst Richard Tse also upgraded this week.  I haven’t got the report but there’s a good summary at Cantech Letter which you can read here.

I’m guessing most of you haven’t heard of Cormark because they are a small, private Canadian investment dealer.  But they also happen to be one of the best shops on Bay Street, and their BlackBerry guy is Richard Tse, a super nice guy and very well respected analyst who’s been around a long time. 

He raised his target from $14 to $20, and took his recommendation from hold to buy.  He sees the company being profitable this year, versus the consensus estimate of a loss. 

Finally, BlackBerry was downgraded by Tom Astle from Bryon Capital.  Remember Byron is another small shop, but Astle is probably the best known tech analyst in all of Canada.  One of the benefits of being at a small shop is way less legacy crap to deal with.  You’d never catch an analyst at a big shop tweeting about his research.  But Astle tweeted out a link to his reasoning behind the downgrade. 

The tweet links to an email he sent to clients and also made public (which is awesome). 

Since the entire note is very short and easy to understand for non-finance people, here it is:

While we continue to believe Blackberry is on a recovery path, we would no longer be chasing the stock at these levels, and we would move to a more cautious HOLD and buy-on-dip strategy.
The stock, at over $16.00, is starting to at least partially price in our best guess (and we emphasize “guess”) at earnings power in C2014 of about $1.60/sh. This is based on a set of assumptions that we agree are pretty hard to nail down, but basically we think the stock has priced in about 30 million units/year of BB10 products.
On a more short-term basis, we are also concerned that unit sales in the February quarter to be reported at the end of this month will not be that exciting, given the staged launch and some data points from the Jabil results on Wednesday. We had modelled 1 million BB10 units for that quarter, but we expect something less than that now. We are more hopeful for margins as we think initial sales of the Z10 have carried strong ASPs.
We’ve liked the stock since it was below $9.00, so we are pretty pleased with the return, and we would look to be more constructive on the stock once we get an update at the end of the month.

My thoughts:  Even the downgrade from Astle was a pretty gentle downgrade.  He’s simply recommending taking a pause here, in case the stock pulls back when numbers come out next week and they aren’t terribly exciting.  Guess what?  That kind of thing happens all the time despite the fact that BlackBerry is on the road to recovery.  It’s a reasonable thing to do given the win that Astle’s call has been so far.  He was earlier to upgrade than nearly everyone else. 

So that’s it for the analyst wrap up.  If you have questions or comments about any of this let me know in the comments.  I do read them and I’ll answer as many as I can in future posts.