Here's the thinking behind Goldman's BlackBerry downgrade

Following a week of largely positive BlackBerry news, this week has started off with a major analyst downgrade.  Goldman Sachs analyst Simona Jankowski has downgraded from a buy to a hold recommendation, cutting her target price to $17 (previously $19). 

I got a copy of the report (thanks, sender) and had a chance to go over it this afternoon.  In a nutshell, Goldman has two main reasons for the downgrade.  Those reasons are 1) the AT&T launch; and 2) consensus estimates have been rising. 

Let’s break it down into plain English ...

The AT&T launch

Goldman thinks the AT&T launch wasn’t very strong.  They checked over 20 stores which consist of company-owned stores as well as Best Buy and RadioShack stores.  Numbers-wise, some stores only sold 2-3 units per day while some sold closer to 10 per day.  They consider this to be disappointing.  

How does this translate back to their financial model?  They think of BlackBerry as a binary event.  Either BlackBerry 10 succeeds or it does not.  If it fails, they see the stock as being worth $15 using a sum of the parts valuation.  If it succeeds, they see the stock as worth $30 using a 10x price to earnings ratio on estimated earnings power.

Consensus estimates have been rising

This reason is secondary, but Goldman also points out that other analysts have raised expectations for device average selling price, gross margin and other key financial metrics.  So when Goldman got bullish on the stock a few months ago, they were making more of a stand-out call.  Today their estimates don’t stand out so much, so they don’t feel as comfortable pounding the table telling investors to buy. That’s pretty much the logic behind their downgrade.

My Analysis

So what are my thoughts?  Oh, I’m so glad you asked!

First of all, the AT&T channel checks are hard to judge.  They only checked about 20 stores and some of them were smaller stores (RadioShack brand).  I kinda wish Jankowski had spent some more time thinking about what the numbers imply.  AT&T has more than 2200 corporate owned stores.  Say each store only sells 3 devices per day.  That’s about 600,000 devices per quarter.  AT&T is a major carrier, but it’s still only a piece of the US market as opposed to the entirety of the global market.  I think AT&T selling more than a half million Z10 phones per quarter is pretty decent when you consider that most analysts think 5 million BB10 sales per quarter would be an enormous financial success for the company.

And we still have to consider sales at Best Buy, RadioShack, Costco, Walmart, and Amazon.  We’ve also got to keep in mind that AT&T has fewer subscribers than Verizon.   As far as BlackBerry subscribers goes, I think the effect is further amplified.  Remember that Verizon sold far more BlackBerry product than any other US carrier over the last few years.  So I’m betting Verizon’s launch will do better than AT&T’s. On top of that throw in some extra sales for Sprint and T-Mobile and I think we can safely say BlackBerry Z10 sales will exceed 1.5 million per quarter in the US alone. 

That’s not bad.  And that doesn’t count the Q10 or any other new product to hit the market in the coming weeks / months.

As for Goldman’s other reason for downgrading?  I understand it.  They upgraded when everyone else still thought BlackBerry was a goner.  Now that a lot of analysts have boosted expectations for device pricing and profitability, it’s not such a lone call anymore. 

Anyway, we’ll see BlackBerry report Q4 (February quarter) results on Thursday night.  I look forward to the fun.