BlackBerry must close down its hardware business because of margin accretion, believes Maynard Um, an analyst at Wells Fargo. Um, who analyzed a number of options available for BlackBerry’s hardware business, said closing the business would create long-term value for the company.

Closing Hardware To Create Long-Term Value For BlackBerry Ltd

Shutting down would result in less revenue

The Wells Fargo analyst believes the Canada-based smartphone maker’s transformation into an endpoint security-solutions company is still in progress with a de-emphasis on hardware. Also proof points in software growth are still needed.

“While investors shouldn’t necessarily discount a successful turnaround, we would wait for greater visibility,” the analyst said.

According to Um, closing down the hardware business would lead to lower revenues, and the sell-side’s FY17 revenue estimates would decline to $1.07 billion from $1.91, but the Canadian firm’s gross margin would improve to 79.5% from 50.5%. Also, in comparison to the current forecast of -0.8%, its operating margins would improve substantially to 17%.

“Shutting down the hardware business would be accretive. We examine a number of options for the hardware business but believe shutting it down would be most value-creating long term,” the analyst said.

Shutting down the hardware business would also improve the EPS forecast from 10 cents to 27 cents per share and could prove to be a game-changer for the Canadian firm, he believes. Such a decision would not only reduce the volatility in its performance but also lower its balance sheet risk.

BlackBerry may see more profits by exiting hardware

BlackBerry stock has fallen by around 24.89% since the start of this year, but in the past month, the stock has begun to gain the lost value and has surged by 4.03%. Any strategic decision from the Canadian firm to enhance its performance would boost the stock’s performance and investor confidence as well.

Wells Fargo has made no changes to its Market Perform rating for the Canadian smartphone maker. The target price range for the stock is $7.25 to $8. This valuation range is based on a fiscal 2017 sum-of-the-parts valuation of 0.1 times for services, 3.0 times for software plus cash and 0.5 times sales of hardware. The average PT on the stock is $7.69. The most bearish and bullish price targets are $6 and $11, respectively.

Overall, 15 out of 26 analysts covering the stock have presented a Hold rating, and eight have an Underperform rating on the stock. Only one analyst has rated the stock as a Strong Buy, while two analysts have rated the stock as Buy. On Monday, BlackBerry shares closed down 1.29% at $6.91.