BlackBerry investment recommendation:
Following very disappointing August quarter results, our Oct./Nov. handset sales survey work indicated very weak sales trends with falling BlackBerry 10 prices and continued high levels of inventory. Following the unsuccessful funding of Fairfax Financial Holdings Ltd (TSE:FFH) OTCMKTS:FRFHF)’s $9/share bid, we believe a sale of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is no longer imminent and few – if any – candidates remain to purchase the company in its entirety.
While we maintain our belief BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) will ultimately end up selling the company due to the difficult competitive smartphone market and low probability BlackBerry 10 can return BlackBerry to sustained profitability, we now believe a breakup is more likely than an outright sale and fundamentals will continue to deteriorate over a now longer public sale process under new management. Despite lowering estimates, we maintain our $6 price target based on our unchanged sum-of-parts analysis.
Given BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s announced exit of the consumer smartphone market and increasing competition from ever-more-capable low-cost Android smartphones in emerging markets, our surveys indicated rapid BB7 share losses. In fact, we believe consumer BlackBerry sales are down more than 50% Y/Y. In addition, our surveys indicate continued soft BB10 enterprise sales, driven by upgrade delays from legacy BB7 enterprise customers given the uncertainty around BlackBerry’s future and increasing competition from BYOD devices, from Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) in particular.
Therefore, we are lowering our F2014 BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) unit estimates from 19.7M to 19.0M, or down 33% Y/Y. In fact, as summarized in our global handset survey and Q3/13 global handset market report published today titled “Q3/13 handset market summary and Oct./Nov. surveys: Apple Inc. (NASDAQ:AAPL) poised for Q4/13 smartphone and tablet share gains; introducing 2015 global handset estimates”, we now estimate BlackBerry has only 1.4% smartphone market share, down from 4.2% in Q3/12 and from 15% in Q3/10.
Despite BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s significant restructuring to lower operating costs, our forward estimates remain below break-even levels. With our lower unit sales estimates, we are lowering our F2014 pro forma LPS estimate from $(0.82) to $(1.09) and our F2015 estimate from $(1.24) to $(1.28).
Our $6 price target is based on our unchanged sum-of-parts valuation detailed later in this report.