A video interview on CNBC yesterday shows two analysts: Peter Misek of Jefferies & Company and Stuart Jeffrey, Executive Director of Global Communications Equipment Equity Research at Nomura with two opposing views on BlackBerry (BBRY). We think that the case Misek delivers in this clip is concise and should be the way to view BlackBerry over the next two to three years. It supports the article we recently published which poses the possibility that a deal shedding its manufacturing division, partially or entirely, can be structured with a company like Lenovo that keeps the BBRY in Canada and turns it into a cash cow.
Quoting from the text accompanying the video, Misek says:
it's not about the hand sets. they don't make any money on their existing handsets. z-10s if they get 5% global market share would be a home run. frankly that's what we were expecting in the U.S. the service revenues, 30 million of subscribers are corporate. they now handle iphones. they handle other devices including android and blackberry on one server. let's say they generate $100 per year on an annual subscription basis. you've got 5 billion at a 40% operating profit or $4 earnings per share in three to five years. that's the key to our thesis. that's the business. that's the future of blackberry.
... we totally agree the z-10, all these hand sets, rim can't compete. that's why we think a chinese tie-up is the way to go. earnings are going to be positive in may.that's the key.
We think the approach Misek suggests makes a compelling case for BBRY. Moreover, it looks as though that is the plan BBRY has been executing since Thorsten Heins has taken the helm. He has focused the company's attention on the QNX operating system, which is at the core of the new BB10 platform that the new Z10 and coming physical keyboard handset Q10 operate.
Our bottoms up approach of valuing BBRY in our article yields a bare bones value for the company of $20.82 or 46% higher than yesterday's closing price $14.23. We think the low trade of $13.64 yesterday may present a new near-term bottom for BBRY shares. The increase in short interest that we have seen in the last NASDAQ report may indicate that yesterday's plunge is due to more short-selling by traders. The next report is due today after the market close. We checked costs for the borrow of shares known as the "negative rebate" remains at 7.5% annual with availability of borrow remaining tight.
"Our retail checks at over 20 store locations since March 22, including at AT&T, Best Buy, and Radio Shack, revealed a surprising lack of marketing support and poor positioning of the product. We also saw limited advertising around the launch."
We did our own three store [AT&T, Best Buy (BBY) and Costco (COST)] retail check on March 22 and March 23 and the results were similar to those discussed in the Goldman report. However, there is no way to check the online sales, where demand seems to be strong according to various sources including Crackberry, which reported times of no availability.
Our conclusion is that the Z10 and Q10 sales over the next 12 months will give BBRY its continued 3.5% market-share as a floor and can improve to 5% or greater with early adopters who recognize the superiority of the QNX OS and the enterprise market who recognize the security superiority of the BB10 platform. With 5% as a market share in a 1 billion smartphone per year market, BBRY can achieve the 50 million units that Peter Misek predicts will deliver the enterprise cash flow of $5 billion with a 40% profit margin. At $2 billion of EBITDA, a multiplier of 10 times would result in a $20 billion valuation, which is equivalent to a $40 price per share in two years. Due to the high short interest in the name, we think shares will continue to be volatile and the shorts may try to break yesterday's low of $13.64 but it will not go dramatically lower from there. We like owning a company having a great product, no structured debt on its balance sheet and with a compelling comeback story that not everyone believes.