There’s A 30% Upside To BlackBerry’s Value If Android Strategy Is Successful

by Trefis Team
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BlackBerry (NASDAQ:BBRY) launched its much anticipated Android handset, the BlackBerry Priv, in early November, combining the firm’s strength in security and productivity features with Android’s sizable software ecosystem. The shift towards Android is widely viewed as a last stand for BlackBerry’s handset business, which has seen massive market share declines amid disappointing sales of a number of BB10-based flagships, with device shipments down around 60% year-over-year for fiscal Q2. [1] Although the company has made it clear that its future will be largely about selling software and services to corporations and governments, there may be a solid upside to be gained from the potential success of the Priv and BlackBerry’s broader Android strategy. In this note, we quantify the impact of the potential success or failure of the Android strategy on BlackBerry’s stock price.

We have an $8 price estimate for BlackBerry, which is roughly in line with the current market price.

See our complete analysis for BlackBerry here

Success Of Android Strategy Could Drive A 30% Upside

Driving growth in the crowded Android smartphone market is not going to be easy, but the Priv does have a lot going in its favor. For instance, BlackBerry has a shot at creating some product differentiation in a commoditized Android smartphone market, considering its software and security expertise – something that most big-name Android vendors lack. Using Android should also help to bring down device and software development costs, since BlackBerry would only need to customize Android software for its devices, while adding the related security and privacy features. The Priv has also received slightly better carrier support compared to some of BlackBerry’s previous launches. AT&T carried the device at launch and Verizon has also indicated that it would be selling the device soon, ensuring wide distribution.

It doesn’t take a lot to move the needle for BlackBerry at this juncture, considering that its revenues have declined by more than 80% over the last three years, with the company’s share of the mobile phone market falling to roughly 0.20% by our estimates. If we assume that BlackBerry’s Android strategy succeeds in the marketplace, allowing the company to improve its handset market share to about 0.50% over the next 7 years, while improving its average selling prices to roughly $250 per unit (versus about $225 per our model) and handset gross margins to about 25% in the same time-frame (versus 22% in our model), this could result in a 30% upside to our current price estimate for BlackBerry.

Downside Of 10% If Strategy Fails

There are many challenges facing the company as well. It remains unclear if the Priv and other potential Android-based BlackBerry devices will find an audience outside the corporate and government verticals, as individuals are less likely to care about the device’s security USP as compared to enterprises. There are specific challenges within the enterprise market, with the Bring Your Own Device trend gaining traction. This could restrict sales of BlackBerry’s Android devices to highly-regulated verticals where companies still need to provide devices to their workforce. John Chen, BlackBerry’s CEO, has hinted that the firm could exit the handset business altogether if it doesn’t sell upwards of 5 million devices a year, and if BlackBerry’s Android strategy fails to gain traction this could very well be the case. That said, this wouldn’t hurt the company’s valuation too much, since we estimate that the handset division accounts for just about 10% of BlackBerry’s value.

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Notes:
  1. BlackBerry Q2 2016 Earnings Press Release []
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