BlackBerry To Take A Hit On Gross Margins, But Z10 Prospects Still Good

| About: BlackBerry Ltd. (BBRY)

Barron's has posted an article about concerns over rising inventory for the BlackBerry (NASDAQ:BBRY) Z10. James Faucette of Pacific Crest mentioned that UK retailer's such as Carphone Warehouse and Phones 4U are discounting their prices.

Carphone Warehouse has dropped the price by £6 a month. So this is a £160 less over the two-year contract term. Vodafone (NASDAQ:VOD) also lowered its price over the contract term as well.

Our checks indicate that as sell-through run-rates for the Z10 have declined meaningfully in the weeks following launch, we believe carriers and third-party retailers in the U.K. are already well above typically targeted inventory levels. Canadian carrier stores and retailers also appear to be rapidly approaching targeted levels, in our view.

- James Faucette, Pacific Crest Securities

It's very likely that Faucette could be right about inventory. These retailers are not known to apply discounts unless their is a buildup of inventory. This might mean that gross margins might have to come down in order for consumers to absorb the inventory and for BlackBerry to keep selling the Z10.

I honestly see no problem with gross margin being lower for the Z10. Investors may be concerned about this, but keep in mind BlackBerry's main goal right now is not to make significant profit. Their goal is to disrupt a market dominated by Samsung and Apple (NASDAQ:AAPL).

I believe the company is on the right track so far. Faucette stated that the Z10 has grabbed 10%-15% of the high-end smartphone market in UK and 15%-20% of the market in Canada.

Investors need to remember that the focus for the company should be market share not profitability. Once BlackBerry can build up a strong subscriber base for the Z10, then they can focus their efforts on providing services and raising prices. Once a consumer likes a product, they will be less sensitive to price increases.

Investors should not worry about margins. The important news is that the Z10 is clearly gaining traction. Market share is growing and BlackBerry seems to be on the right track.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.