BlackBerry Z10 Already A Winner

| About: BlackBerry Ltd. (BBRY)

Less than four weeks ago, analysts at Pacific Crest and Canaccord issued a downgrade of BlackBerry (NASDAQ:BBRY), with a $9 target price and a sales forecast of 300,000 Z10 phones for February. James Faucette of Pacific Crest, who has been bearish on BlackBerry since before the Z10 launch, also rated the chances of BlackBerry's new line of phones being a success at less than 1 in 10.

In the days following the Z10 launch on January 25th, the news for BlackBerry was mostly bearish. Firstly, the company announced that the launch in the USA would be delayed, then we had news of Home Depot (NYSE:HD) switching to the iPhone (a decision which most likely was made long before the launch of the Z10). These news items were accompanied by analyst downgrades. Doom and gloom articles with titles such as "Is the BlackBerry Z10 already a flop?" could be read daily on all of the financial websites.

The share price had dropped from $18 just prior to the launch date, to about $12.50 by March 5th, and the number of shares sold short had risen to over 147 million (28% of the float) as of February 28th.

Meanwhile, in the real world, where analysts never seem to tread, something totally different was happening:

  1. People who buy the phone like it. They like it so much that they tell their friends about it, and their friends buy it. They post comments on the internet and those comments are overwhelmingly positive. People love the Z10 operating system, there is no doubt about that. There is an old adage that if you make a better mousetrap, the world will line up at your door to buy it. BlackBerry has made a better mousetrap.
  2. Customer satisfaction surveys have rated the Z10 as the best phone on the market today.
  3. The company has said that sales have exceeded expectations, and that a significant number of customers are switching to BlackBerry from the Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) Android platforms
  4. One retailer in Canada has stated that the BlackBerry Z10 is leading the smartphone sales in its stores
  5. BlackBerry has stated that is has increased production of the Z10 phone to keep up with demand
  6. The German government has committed to use the BB10 operating system, and will purchase at least 5,000 phones
  7. An expected 5 days supply shipped to India sold out in two days
  8. A report in Barron's that said orders to component suppliers have been increased by "orders of magnitude", to levels approaching those of 2011
  9. A BlackBerry partner has placed an order for 1 million phones (the largest ever single order in BlackBerry history).

There have been a few articles by sell side analysts who don't seem to believe what is happening. One rather silly article, again from Pacific Crest, tried to claim that a build-up of inventory at some U.K. stores indicated that sales of the phone had stalled, when in fact the inventory build-up was more likely an attempt to keep sufficient stock on hand to meet demand. The Canaccord analyst increased his sales forecast for February by a factor of 2.7, but he tried to put a negative spin on it, and reiterated his sell rating.

The simple fact is that in the last couple of weeks, there has been a definite swing in sentiment. The news articles which point to a successful launch of the Z10 phone now exceed those which are critical of BlackBerry. Also, throughout the period since the launch, the positive news articles have generally come from more reliable sources than the negative articles.

Although he is still trying desperately to push the bearish viewpoint, it looks increasingly like Mr. Faucette's ten to one long shot is heading towards the winner's circle.

In previous articles, I have made an evaluation of BBRY for three different scenarios, and a forecast of sales. I am sticking with my sales forecast of 7 million BB10 sales per quarter. I have made a small change in my financial model to change the gross margin on services to 80% (from 50%), and I have adjusted the gross margin on older model phones to zero.

Quarterly Revenue
Z10 and Q10 sales (Units) 7,000,000
Z10 and Q10 income (millions) 3850
Older phone models revenue 900
Services and software revenue 1000
Total revenue (millions) 5750
Quarterly expense
Z10 and Q10 costs 1833
Older phone model costs 900
Services and software costs 200
Launch costs 500
Selling, general and admin costs 500
R & D costs 500
Total expense 4433
EBITDA (quarterly) 1317
EBITDA (annual) 5270
Enterprise value 26348
Share value $ 50.21

My revised forecast is $50 per share, and I have not taken into account possible licensing deals or takeovers. The upcoming short squeeze could temporarily push the price much higher.

Disclosure: I am long BBRY. 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.

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