Seeking Alpha
Research analyst, oil & gas, tech, mid-cap
Profile| Send Message|
( followers)  

BlackBerry (NASDAQ:BBRY) has been on a stormy ride for the last few months. After gaining around 86% during a six month period, the stock has witnessed a downfall of ~24% in the last one month. These movements were all around the much-hyped "BlackBerry 10 launch" on Jan 30, 2013. Under this platform, the company launched the latest touch screen BlackBerry Z10 and the keyboard smartphone Q10. With this launch, BlackBerry makes its first attempt at the new technological era, focusing on innovation and style. This also provides an opportunity to the company to climb back into the industry that is currently dominated by Apple (NASDAQ:AAPL) and Google's (NASDAQ:GOOG) Android. After oodles of information flowing about the launch, BB10 has been successful in creating a buzz among the analysts as well as the technology watchdogs. Let's find out who's gaining and who's losing out in this whole scenario.

(click to enlarge)

Source: Yahoo Finance

The Rationale

  1. The touch screen Z10 is off to a good start in Canada and UK with the initial buying surpassing BB's previous launches. These two markets have so far remained stronger for BlackBerry. Various stores have posted good sales numbers with a few of them even surpassing Apple's iPhone 5. These customers are not only those who are switching from the previous BlackBerry models. They also include those who are switching from iOS as well as Android. In UAE, BlackBerry has officially sold out its stock showing a powerful demand in this region. I am not saying that these markets suggest the switching/buying to be a widespread phenomenon, but this definitely provides a positive momentum to Z10 all around. With all these positives around, various analysts are expecting the company to ship around 35.5 million devices in FY14.
  2. The BB10 launch will mark a start for the company to enhance its gross margins. Currently it is selling most of its top-end devices with negative margins to push up the sales. BB10 devices offer a positive gross margin to the company which will boost up its profits in 1Q14. I expect the initial shipments to cover a gross margin of around 30%.
  3. Another significant probability for BlackBerry exists with the big carriers such as AT&T (NYSE:T), Verizon (NYSE:VZ) and China Mobile (NYSE:CHL). These companies are looking for some big alternative to reduce their dependency on iOS and Android for their sales. Both Apple and Samsung (OTC:SSNLF) have dominated these carriers with huge phone subsidies resulting in lower profit margins for them. Apple even insisted the carriers pay for the advertising and the replacement cost of its phones. To gain out of this opportunity, BlackBerry really needs to coordinate itself with the carriers to create a meaningful substitute for them.

The Glitches

  1. The timing for the launch of Z10 in the US market is a disappointing factor. The devices are not expected to launch in the US until March, 2013 or maybe later. The delay is mainly elongated due to the testing of new devices by the US carriers. I feel this delay can lower the overall sales figures of the company, as for a powerful comeback BlackBerry needs to tap the crucial US market. Moreover, the company has spent ~$4 million for the marketing of Z10 with its super bowl ad. However, with this delay in the launch the customers won't be able to buy the phone even after watching this commercial.
  2. This delay will also push the US launch of Z10 closer to its rivals. Samsung is all set to launch its latest version of Android based Galaxy range (Galaxy S IV) in April or May, 2013. Similarly, Apple is also coming out with its iPhone 5S somewhere around in August, 2013. Both iOS and Android currently rule the smartphone industry and it will be really difficult for Z10 devices to compete with them after these launches. The ubiquity of these two giants provides them a unique competitive advantage over BlackBerry. Especially with Google, these advantages have encouraged a lot of companies to launch their own variations of Android for their smartphones. Due to the extensive presence of its product range, Android devices will continue to dominate the industry. Google is expected to cross the mark of around 1 billion devices in the coming few months.

The bottom line

Investors are now clearly observing the initial success of the BB10. Even though BB10 has an appealing interface and some good quality features, I don't feel these are enough to face the industry pressures. However, on the positive side, despite the company's shaky performance, its cash flows have remained strong. Also, the much created buzz around the BB10 devices will help the company to regain a small portion of the share from the major competitors. In the short-term, I expect the stock to remain volatile reacting over every small piece of information floating in the market.

However, in the long-term I believe the successful launch of the BB10 will open up new avenues for the company. Some of the favourable opportunities can include new partnerships or acquisitions, improved business models and a secured niche positioning. Further stabilization of the company following the launch can provide a good entry point in the future. I advise a hold for this stock for now.

Source: BlackBerry: Waiting For The Sunshine