BlackBerry: A Speculative Stock Poised To Bounce

| About: BlackBerry Ltd. (BB)
This article is now exclusive for PRO subscribers.

The high margin "torch" has been passed by Apple (NASDAQ:AAPL) to BlackBerry (BBRY). I never thought I would be saying all of this in the same sentence, but since it appears that Apple will be entering the commodity price smartphone sector, their margins have eroded as I pointed out in this article.

It was not long ago that Apple was making margins that amazed the investment community, but it appears that BlackBerry will slide into this coveted spot. Estimated by experts in the business, the new Z10 costs $154 to manufacture, and the pre-subsidy price of about $600, or £500, gives this phone a remarkable profit margin.

A gross profit in dollar terms would be roughly $446 per phone. In comparison, the premium iPhone has returned about $50 per phone, less (or £39 less).

As noted in the above report:

In comparison, a 16GB iPhone 5 costs around £133.35 to make according to Research firm IHS, and each iPhone costs £529 from Apple, so therefore Apple makes £395.65 profit on each device it sells - a whole £39 less than BlackBerry.

When the phone hits the US markets later next month, it will have an anticipated subsidized price of $200 per phone. That is also a profit margin of over 30% after subsidies.

The profit margins are not the whole story however.

Decent Sales And Analyst Ratings Are Pretty Good

At the same time the Canadian smartphone maker, BlackBerry, has launched the new Z10 phone in various parts of the Eastern World, with some positive results thus far, and at least one major analyst has a buy rating on the stock on increased sales.

Jefferies said their survey and checks indicate that smartphone sales seem to be decelerating in front of some major launches such as Samsung Galaxy S4 and iPhone 5S.
They see risk to their CQ1 Apple iPhone shipment estimate due to additional build plan cuts, but raise February-quarter estimates on Buy-rated BlackBerry due to BB10 sales.....the firm has a price target of $19.50 of the stock.

I might not be telling the techies of the world anything they do not already know, but we are in the investing game, and the making money game. Especially when I decide to add this stock to the Young and Restless portfolio for the aggressive investor.

My take on the issue is rather simplistic, in keeping with my regular investor, bottom line, keep it simple, approach:

  • From nothing, to perhaps 20 million phones sold in 2013, is something to take note of.
  • If 20 million phones are sold, with an average gross profit of $446 per phone, that will put roughly $9 billion in profits directly into a wide open cash register.
  • Revenues approaching $15 billion will put BlackBerry back on the "hit list."

No numbers have been released, so we could be ahead of the curve based on this article, which notes:

Interestingly, BlackBerry and its retail partners are only talking about the robust shipments, but they aren't saying anything about the exact figure. But why they are reluctant to disclose the figure? Are the first weekend sales of BlackBerry Z10 better than Apple's iPhone 5? It won't be a rationale to compare BlackBerry Z10 with iPhone 5. However, it might be true that the sales of BlackBerry Z10 were better than its predecessors during their first week of their availability. But sales figure might not be impressive for the company's shareholders compare to the sales of other high-end smartphones. This might be one of the reasons why BlackBerry hasn't reveal its sales figure for the latest BlackBerry 10 device. Just a week before, a research analysis firm-ABI Research-estimated that 20 million BlackBerry 10 devices would be sold this year.

To be very clear, we simply do not know what the results will be, but isn't that the point of a speculative stock, in an aggressive growth portfolio?

Let's not forget that there has been all sorts of speculation about a potential takeover of BBRY as well. As noted in this late January article:

While a "union" may not be easy, feasible, or even sensible considering RIM's current claw-back to the mobile market, Lenovo's smartphone business could flourish if it were able to get its hands on the Canadian smartphone giant. It's not as simple as Lenovo saying, "let's buy RIM," but the computing giant shouldn't rule out a bid for the smartphone maker in the future.

Even as recently as yesterday, this article noted:

BlackBerry maker RIM, and Google are starting to bite into Apple's market share. Nokia has bounced back and posted profit after failing to do so in the previous quarters, RIM is being considered to be bought out by Lenovo, and Google is set to release new Motorola phones.

Again, this is nothing new to the technophiles here, but keep in mind that based on the potential revenue and profits that I have noted above, the share price could rise dramatically, just on those figures alone.

Since the company changed its name to BlackBerry, the shares have dipped from a high of about $17.00, down about 25% in a short time. It is true that the shares have risen from the single digits prior to the name change, but it is also selling at a DISCOUNT to book value right now, by about 23%, which also makes it appealing from an aggressive speculative standpoint.

The Case For Doubling The Share Price

Just by virtue of the analyst price target of $19.50/share (previously noted) from current levels, that would represent about a 50% increase right there. If the sales and revenues come close to the ones estimated by ABI Research, then the current PE ratio of around 3.50-4.25 is ridiculously low, as is the discount to book value.

The book value metric alone is the most compelling argument. If we give it a price to book of just 1.40 (which is Nokia's by the way), then we can add roughly 95% to the current price.

Looking at the basic fundamentals, an even stronger case could be made for a very strong bounce, even if it were not a 100% increase.

  • As noted, a 23% discount to book value.
  • $2.73 billion in cash.
  • Zero debt.
  • An approximate book value share price of over $18.00 per share just based on the balance sheet.
  • A price to sales ratio of just .53

If we were to take just 1/3 of the projections noted above (20 million phones sold in 2013), we could still come up with a gross profit of nearly $3 billion in cash, with revenues approaching roughly $5 billion.

As far as I am concerned, it will not take much to move the needle rather nicely, and quickly. While the stock might not double soon, it is clearly selling at a discount. With all of the potential noted above, I believe we just might have a winner.

Also, if there is anything behind the rumors of a takeover by Lenovo, I believe that my estimates could be conservative.

Adding BBRY To The Young And Restless Portfolio

The "Young and Restless" portfolio consists of Amazon (AMZN), Google (GOOG), Facebook (FB), Netflix (NFLX), Yahoo (YHOO), Achillion (ACHN), and Zynga (ZNGA).

As you might know by now, I have reluctantly sold Apple from this aggressive portfolio, and in keeping with the initial strategy, noted in this initial article, adding a speculative stock that actually does have the potential to give investors of this profile very impressive gains, makes perfect sense.

The most recent results of this new portfolio can be reviewed right here, and the figures are prior to the sale of Apple stock. I will be updating this portfolio on a monthly basis, and the next update will actually show dollars as well as percentages.

Thus far, the results are impressive.

*Disclaimer: This article is not a recommendation to either buy or sell any security. It is the sole opinion of the author, and any investor should do their own research prior to making any investment decisions.

Disclosure: I am long AAPL. 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.

Additional disclosure: I am long Apple in the Team Alpha portfolio.