Where Is BlackBerry Heading?

| About: BlackBerry Ltd. (BBRY)

By: Jayson Derrick

BlackBerry (NASDAQ:BBRY) is becoming one of the most talked about stocks these days in an interesting battle of passionate bulls versus bears. Both sides present compelling arguments, while consumers continue debating if the brand new Z10 and Q10 phones are winners, or will they continue BlackBerry's unfortunate past history of releasing sub-par phones.

Bull take

Bulls are focusing on five key points to justify a run-up in BlackBerry's stock.

  1. The company indicated sell-through is 40% above its projections with one partner ordering 1 million units.
  2. Several larger retailers have confirmed strong Z10 demand.
  3. The Z10 is number 5 on Carphone Warehouse's top 10 monthly phones in the U.K.
  4. India sold out in two days.
  5. The German government placed an order for 5,000 phones.

Bear take

Bears are pointing out that the largest and most important market, the United States is a concern. The U.S. represents around 20% of total subscriber base, and early checks of pre-orders at AT&T (NYSE:T) indicates that consumer interest is lacking compared with Canada and the U.K. Also working against BlackBerry is the fact that Sprint (NYSE:S) will not be carrying the Z10. The timing is also awful as the much larger, and popular Samsung will be releasing its GS4 phone very soon. The GS3, a very popular phone is likely to see a price cut and this is the largest hurdle for BlackBerry.

My take

As a former BlackBerry user, I won't be returning back despite being a loyal user for the previous five years before switching to an iPhone in late 2012. It is estimated that 45% of Z10 buyers are coming from iPhone or Android, and any of these users who place a large emphasis on apps is likely to be disappointed. The large number of "coming soon" apps that are easily available on other platforms is an annoyance that can prove to be a negative for the BlackBerry.

It is really difficult to quantify consumer and enterprise demand for BlackBerry 10 beyond the loyalists who will stick by the company through thick and thin. BlackBerry has lost significant market share throughout the past few years, which will be difficult to recapture. One way the company can regain customers is through its enterprise operations. The company's enterprise users have been more resilient to change versus the consumer segment. Competition has increased over the past few years and the trend toward BYOD (bring your own device) has allowed enterprise users to use their personal iPhones and Androids, something that did not exist a few years ago. There is a lot of enterprise demand for the new BB10 and BES10 software, from employees and IT departments looking to upgrade their devices. BB10 supports Microsoft ActiveSync, which can target the less security conscious enterprises, a move that can increase BlackBerry's market share and capture new markets. By supporting Microsoft ActiveSync, BB10 permits connection to enterprise email without the requirement of a BlackBerry Enterprise Server.

A name change from Research in Motion to BlackBerry signifies a change in image, and a subtle admission to the failures of the past and a desire to move forward. The company is just a few weeks into the worldwide product launch and it is still too early to gauge BlackBerry's performance. Investors must wait until quarterly earnings on March 28, to get the first official glance at the success or failure of the new phones.

Best-case scenario

An upside/best-case scenario assumes much better than expected sales from the consumer market in all markets worldwide, slower legacy BlackBerry declines, upsell of value-added enterprise and consumer services, greater enterprise resiliency, and improved operational performance driving higher margins. BlackBerry makes its popular BBM chat system available on other platforms a clear winning move for the enterprise market, while consumer market sales continue to surprise in all markets worldwide. The strongest bearish BlackBerry analyst takes a second look at the company and changes guidance to a more favorable one.

Under this scenario, revenue for 2013 can grow in the 20-25% range to $15.04 billion with margins of 0.4% driving EPS to the $0.10-$0.15 range. 2014 will bring further growth and if the company continues the momentum, EPS can grow to $1 a share if not more. This is a somewhat believable and possible scenario, and if this is achieved the stock can see share prices at the very least double in price.

Neutral case

Under a neutral case scenario, BlackBerry sees better-than-expected sales that slightly beat (or match) the street's consensus. Product reviews are generally positive, but BlackBerry just can't keep up against Samsung's new GS4. BlackBerry will spend over $2 billion in sales and marketing in 2013 to advertise the new platform resulting in moderate success.

Revenue can grow 1% to $12.22 billion but EPS will be in the negative at around $-0.75. The company can improve EPS in 2014 in the range of $0.04-$0.10. The stock should see a decent appreciation to new 52-week highs, as the company has improved the business and outlook.

Worst case

Worst case, the BlackBerry is a failure, like several of its previous releases. The phone is not living up to expectations, and an aggressive sales push by competitors especially Samsung kills any momentum BlackBerry once had. Sales are low in all key markets, and a failure in the United States.

Revenue will decline to $10 billion and EPS will worsen from current figures. The stock will drop to new 52-week lows, and BlackBerry will be an attractive takeover target as its assets, technology and proprietary knowledge still have value and interest for another firm to acquire.


On the consumer front, I am not yet convinced that the phone can live up to the hype. The lack of apps such as Netflix, Skype, Instagram might foreshadow the possibility of low sales growth. In a recent article, I blasted BlackBerry for disappointing customers and shareholders since 2008 and I would need to see a very positive quarterly result at the end of March before changing my views. I already indicated that this is a possibility, but until that confirmation, I see no reason for investors to rush in and buy the stock.

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.

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