UPDATE: BlackBerry (BBRY) Gets Another Bull; Morgan Stanley Raises Two-Notches to Overweight

March 20, 2013 7:14 AM EDT Send to a Friend
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(Updated - March 20, 2013 10:33 AM EDT)

Morgan Stanley upgraded BlackBerry (Nasdaq: BBRY) two-notches from Underweight to Overweight, boosting its price target from $10 up to $22.

Cited in the upgrade, analyst Ehud Gelblum sees a mix-shift at BlackBerry lifting margins "even after accounting for the steep decline in higher margin services revenue."

Gelblum is adopting a new sum-of-the-parts (SOTP) methodology on the known assets in valuing BlackBerry given lessening hope for the company to occupy the third spot for mobile OS market share. He explains, "that with Windows Phone 8 lacking traction in the marketplace, perennial Android vendors, LG, buying webOS from HP, and Samsung trialing the Tizen operating system later this year while doing its best to differentiate its smartphones from standard Android, we believe the smartphone market may yet look to move off its two-OS system, making BBRY’s BB10 OS potentially valuable to other industry players looking to diversify."

Discussions with developers have also become positive. Many are now on "wait-and-see" rather than completely writing off BB10. BlackBerry currently has about 100,00 apps, including 90 percent of the top 100. Most were ported from Google (Nasdaq: GOOG) Android. Gelblum says apps are a key component in launching a new OS and this level is better than initial expected by this time.

BlackBerry is still probably selling its BB10 OS to existing BB7 users and Gelblum doesn't expect investors to see a noticeable difference until the November quarter, particularly when most enterprise customers won't make a decision on switching to BB10 until late summer, at best.

As for subs, MS is looking at a drop from 77 million in FY12 down to 57 million in FY15. With that number and assuming that 38 percent of BB7 users plan to upgrade to BB10, the firms estimates start panning out.

Gelblum sees BlackBerry's Device unit getting back to breakeven by fiscal Q314. He sees BB10 device gross margins at about 20 percent with a ASP of $450 and bill of materials (BOM) at $300 to $350. "We are assuming a rapid decline in BB10 ASPs to $343 by FQ414 from $450 at launch in FQ413, a 30% decline, due both to tough competition within the smart- phone market and to a mix shift to lower-end models," he noted.

The outlook is grim for Services, Gelblum commented, given that BB10 doesn't use NOC the same way as previous versions. He's modeling that consumers contribute zero to services revenue, from $3.50 per month now, and sees little incentive for consumers to want to pay a fee for services they can get for free.

Enterprise subs will make up 12 percent of BlackBerry's total count in FY15, from 17 percent currently. Gelblum also thinks half of enterprise will use BB10 for MDM.

SOTP puts Services with a value of $2.9 billion, Patents are flat at $1.41 billion, Fixed Assets increases $1 billion to $2.45 billion, working capital moves from $30 million up to $2.16 billion, and Cash is at $2.47 billion. Net asset value per share is than about $21.74.

Bear case - Management pursues BB10 strategy, but product launch fail. Management funds Devices with cash generated from Services, leading to ongoing discounting of Devices. No value is assigned to inventory given that it will slip into obsolescence. Investors will then assign a lower value on patents and fixed assets at that point. Bear case price target is $10.

Bull case - BlackBerry management stabilizes handset margins and market share with the launch of BB10, but Service revenues still fall. Overall revenue in this case will drop 7 percent from $17.2 billion from FY12, gross margin at 34 percent, operating margins at 9 percent, leading to EPS of $2.32 by FY14. Bull case price target of $35.

Currently about 10 analysts have BlackBerry at Buy, 26 at Neutral, and 21 with a Sell-equivalent rating. The Street's average price target ahead of this recent boost was $12.

For an analyst ratings summary and ratings history on BlackBerry click here. For more ratings news on BlackBerry click here.

Shares of BlackBerry closed at $15.03 yesterday, with a 52 week range of $12.55 to $17.22.


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Comments

better track record?
Paul Fezziwig on 2013-03-20 15:19:00
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Let's see, should I heed Morgan Stanley's advice or the group of BB bashers Eric Savitz, James Faucette, MKM, The Fool, Forbes and BGR.......looks like the market answered that question for me today.


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