BlackBerry rides optimism ahead of launch

The stock gets an upgrade as Wall Street awaits Friday's release in the US of the new Z10 touchscreen smartphone.

By TheStreet Staff Mar 20, 2013 5:00PM

thestreet logoBlackBerry 10By Chris Ciaccia

 

BlackBerry (BBRY) stock surged more than 6% today in New York after an upgrade from a Morgan Stanley analyst.


The analyst, Ehud Gelblum, said he now sees the possibility of the BlackBerry emerging as a "niche midrange player" in the smartphone market.


Gelblum upgraded shares of the Canadian company to "overweight" from "underweight" and raised his price target to a Wall Street high of $22, saying he gross margins from the BlackBerry 10 will add to earnings this year.


BlackBerry intends to launch its new Z10 touchscreen phone in the U.S. on Friday. Analysts will be watching to see how much traction the Z10 -- which uses the new BlackBerry 10 operating system -- will gain against Apple(AAPL) and Google (GOOG), the dominate players in the American market.


Favorable reaction to new device cited

BlackBerry 10, announced in late January, should help the company transition away from BlackBerry 6. The Z10 carries a margin of around 20%, and Gelblum believes the margins on the Q10 could be as high as 30%, or almost Apple-like.

 

"Since we now believe gross margin can continue to expand in the near-term on the device mix-shift, even after accounting for the steep decline in higher margin services revenue, we are adopting a new SOTP (sum of the parts) methodology replacing the one we adopted last June, and therefore we are raising our SOTP-based price target to $22 from $10," Gelblum wrote. 

 

He values the services part of the business at $5.56 a share, and that's assuming the troubled segment reaches a break-even point in the third quarter of next year. Services, inventory and BlackBerry's network operations now account for an additional $5, $4 and $2 in per-share value, respectively, with the higher gross margins adding $1 a share. The $12 increase in BlackBerry's business segments caused the SOTP price target to be raised to $22.

 

Though the price target is being raised and the stock is being upgraded, Gelblum noted he does not believe BB10 is likely to emerge as a third viable operating system in the United States, where Google's Android and Apple's iOS dominate. 


He is modeling a 3.5% market share globally for BlackBerry in fiscal-year 2015, a far cry from Android or iOS. But the upgrade represents a measure of optimism that the new BlackBerry can carve out a niche in the market. 


A shelf life

BlackBerry CEO Thorsten Heins recently commented on Apple's iOS, saying that the operating system was showing its age. "History repeats itself again, I guess . . . the rate of innovation is so high in our industry that if you don't innovate at that speed you can be replaced pretty quickly," Heins said during an interview with Australian Financial Review. "The user interface on the iPhone, with all due respect for what this invention was all about, is now five years old."

 

Heins went on to talk about how the BlackBerry 10 is capable of running multiple apps at the same time, whereas iOS is not.


At launch, BlackBerry 10 has around 100,000 apps, with many of them ported from Android, a far cry from Android and iOS, which both have around 700,000 apps. This is actually more than some on the Street were expecting, and could mean that BlackBerry 10 has a shelf life. 

 

"Since we believe a vibrant apps ecosystem is vital to the success of BB10 longer-term, we see this as step in the right direction, at least leaving the door open to the company possibly making a successful turnaround," Gelblum penned in his note.

 

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