BlackBerry Ltd (BBRY) Fair Value Target Raised By MKM Partners

An analyst at MKM Partners raised the fair value target for shares of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) based on his perception that the struggling Canadian smartphone manufacturer has lower cash burn.

MKM Partners analyst Michael Genovese increased his fair value target for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to $10 from $6.75 per share, but maintained his Neutral rating for the stock.

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BlackBerry’s cash burn to be lowered due to Foxconn outsourcing

In a note to investors, Genovese explained that he believed the Canadian smartphone manufacturer’s cash burn will be lower due to outsourcing to Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF).

Prior to its deal with the Taiwanese manufacturing contractor, the analyst estimated that the on-going cash burn of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) was $500 million per quarter. Following its agreement with Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF), Genovese projected that its quarterly cash burn declined to an average of $250 million.

“We now think the company’s net cash balance can stabilize at about $2bn assuming an additional $1bn in cash burn from operations and restructuring mostly offset by real estate sales and tax refunds,” according to Genovese.

The analyst now has a $4 per share credit cash for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB), which was previously zero. Genovese said his $10 fair value target for the stock represents $4 for the cash, $4 for the Enterprise business including Services and MDM, $1 for Handsets, and $1 for BBM and QNX.

Genovese also said, “The other significant change is, since we now view BlackBerry as a going concern, we do not assign a separate break-up value for the intellectual property portfolio.”

Bull case for Enterprise business likely overstated

The analyst also noted that a bull case is present around the Enterprise business of the Canadian smartphone manufacturer, but he believed that it was likely overstated. He noted that the bull case for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is that the growing MDM sales might be able to offset its declining BB7 services revenues faster. In addition, there are suggestions that the Enterprise business is worth 2x or 3x more than the assigned value of $4 per share.

Genovese said, “As we understand it, the bull case concedes that the company’s existing Services revenues from BB7 and prior subscribers is likely to drop by $1bn-$1.5bn from $3.9bn in FY2013 to somewhere in the neighborhood of $2.7bn in FY2014. The bulls apparently believe BlackBerry can offset this decline with a corresponding increase in MDM (Mobile Device Management) sales.”

“However, analysis of the MDM market suggests this type of revenue projection is likely way off base. According to Gartner, the entire global MDM market is expected to be $1.6bn in 2014 and there at least 128 competitors in the space. We believe BlackBerry has lost the Enterprise MDM mind share crown and is now just one of many MDM vendors looking to capture a small slice of the market,” added Genovese.