BlackBerry Is Going To $10.50, Z3 Is Launching In More Countries

Jun.29.14 | About: BlackBerry Ltd. (BBRY)

Summary

The BlackBerry Z3’s release in the Middle East and India should keep the momentum for BlackBerry's comeback bid in smartphones.

Foxconn won’t be expanding sales of this handset to other countries if it was a flop in Indonesia.

Semi-premium phones should help John Chen achieve his annual 10 million handset sales target. Better sales numbers for BB10 smartphones can lead to $10.50 price target.

I was offline for two weeks. BlackBerry (NASDAQ:BBRY) posted double-digit growth performance while I was on vacation. Some investors, who bought BBRY at $8 and below, can justifiably do some profit taking this coming week.

On the other hand, some die-hard BBRY fanatics may continue to hold on to their stocks and wait until BBRY hits $10.50. The upcoming commercial launch of the BlackBerry Z3 in Middle East countries is a strong tailwind towards this near-term price target. The Z3 will also launch in India on July 2 and in Malaysia on July 7.

This expansion into new markets for the $200 BlackBerry Z3 is proof that Foxconn is finding it profitable to do so. Terry Gou will not allow his company to be a mere shock absorber for John Chen's efforts to turnaround BlackBerry. Profiteering motive, not charitable sentiment, is behind the upcoming release of the Z3 in other countries.

Quality Marketing for Quality Phones

Strong sales of the Z3 in more countries may boost hardware sales' contribution to BlackBerry's top line and bottom line. Hardware sales now only account for 39% of BlackBerry's latest revenue. I look forward to phones growing back to contributing more than 50% of total sales.

With $3.1 billion in cash reserves, John Chen can afford a quality global marketing campaign for the BlackBerry Z3. Before the iPhone cult, there was once a BlackBerry cult. Recruiting former users who defected to the iPhone is a tall order. The excellent Z30 failed to regain the loyalty of former BlackBerry premium phone users. Competing with the iPhone is a futile venture.

On the other hand, a $200 BB 10 handset can still be marketed as a mini-social status symbol to budget-constraint customers in emerging markets. The good quality of the Z3 and affordable price tag of the Z3 makes it attractive to many Indian, Malaysian, and Middle East customers.

Instead of marketing the Z3 as a low-entry budget smartphone, I believe that Chen is effectively positioning this handset as a semi-premium alternative to Android handsets.

The Z3 has a nice niche market between cheap Androids and expensive iPhones. Instead of Asians paying $250 for used iPhone 4S, they should be convinced that the $200 Z3 can also pass as a social status symbol. John Chen needs to revive the old BlackBerry cult-like appeal among new customers.

The United Arab Emirates, Saudi Arabia, Bahrain, and Qatar are full of very affluent customers. However, those countries are also populated by foreign Asian workers who cannot afford the $600 or so price of the iPhone. The rich Middle East citizens may not steep down for the Z3, but the millions of foreign workers may find the Z3 a good alternative to expensive used iPhones.

India has a huge population. The larger part of the smartphone buying crowd in that country may go for cheap Android handsets. However, there will still be enough number of potential buyers for the Z3. BB 10.21 now supports easy installation of Android apps so this should excuse the higher price tag (compared to Android phones). Having a unique phone among a crowd of Android phone users is already a sort of a social status icon.

Malaysia has a small population. Sales of BlackBerry Z3 there will not significantly influence the balance sheet, but any market that offers warm welcome for a wallet-friendly but good quality BB10 phone is important.

John Chen wants to win the war for the Z3 by country hopping, much like what Gen. Douglas McArthur did in World War II Pacific Campaign. Big or small, emerging markets are good source of handset sales.

A Return to Profitability in Handsets

BlackBerry's pace of recovery was and still is largely dependent on a good comeback in smartphones. I see BlackBerry trading $15 within 12 months if the company can make decent money in selling handsets again. The much-improved cash burn result in BlackBerry's FQ1 earnings report boosted the stock to what it is today.

However, Blackberry's pace of recovery can benefit from making the hardware phone business profitable again. The 2015 FQ1 earnings report revealed that BlackBerry recognized revenue on 1.6 million BB devices, almost 24% higher than the previous quarter's 1.3 million devices. The BlackBerry brand is in no danger of dying.

The market share is tiny compared to Android and iOS products. However, Chen, with the help of Foxconn, is showing the world that BlackBerry phones can win back the hearts of former customers. The YTD performance of BBRY for 2014 is much better than Apple (NASDAQ:AAPL) or Samsung (OTC:SSNLF). This is a strong testament that many investors have faith in Chen's rescue plan for BlackBerry.

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Source: Google Finance

Conclusion

BlackBerry is a near-term and long-term Buy. This ticker can still benefit from the Z3's penetration of more countries. India and the Middle East offer a huge market for semi-premium BlackBerry OS 10 phones. John Chen does not have as many cult-like following like Elon Musk, but he has enough fans to keep BlackBerry chugging along towards my profit-taking-time target of $10.50.

Finviz has an average price target of $10.90 for BlackBerry. If July proves to be full of positive news for Z3, $10.50 is feasible this month. The post-earnings euphoria is already more than 10 days old. The bears are still unable to find anything negative to put down BBRY.

Chen is rapidly executing his rescue plan as he promised. BBRY's less-than-one P/S and P/B ratios make it attractive for opportunistic investors who like buying on the cheap.

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My bullish sentiment over BBRY is in contrast with the Hold recommendation of 22 analysts at BarChart. However, please be informed that BlackBerry's short, medium, and long-term technical indicators are eyecandy for bulls - an overall 80% Buy. I am not as daring or as deep-stack as Quoth the Raven, but I firmly believe that BlackBerry can deliver $10.50.

The $10.50 price target is based on a forward EPS estimate of a positive EPS of $0.02 (525 P/E) by March 2016. I have great faith in John Chen to not only offer positive cash flow in the next three quarters, he might also surprise us all with one or two cents of net EPS by the end of this fiscal year.

Strong global sales of the Z3 and other BB10 handsets can accelerate the recovery rate. This is how I estimate the EPS pattern.

  • Q314 : -0.67
  • Q414 : -0.08
  • Q115 : -0.11
  • Q215 : -0.05
  • Q315 : -0.02
  • Q415 : +0.02

Disclosure: The author is long BBRY, AAPL, GOOG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.