BlackBerry Ltd (BBRY) Valuation Bar Set By Nokia-Microsoft Deal

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Microsoft Corporation (NASDAQ:MSFT) acquisition of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Device and Services (D&S) business has set a bar for valuation of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s hardware business, according to CIBC research analysts Todd Coupland and Robin Manson-Hing. Software giant Microsoft entered into a deal to buy the Nokia Devices and Services business for EUR 3.79 billion, and license Nokia’s patents for EUR 1.65 billion.

BlackBerry Ltd (BBRY) Valuation Bar Set By Nokia-Microsoft Deal

 Microsoft is taking over Nokia’s business to enhance its share, scale and profit in mobile devices and services.

BlackBerry hardware segment not getting comparable valuation

In the second quarter of the current fiscal year, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) garnered a smartphone market share of 3 percent that is equal to that of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB). In the Microsoft deal, Nokia’s device division was valued at 0.3x TTM EV/Sales. For the second half, sales for Finnish firm was down 32 percent year over year (Y/Y) and with an average selling price (ASPs) of $45.

However, BlackBerry with ASP of $225 and TTM sales down 38 percent Y/Y is not getting any valuation for its Hardware segment.

In the second quarter, 96.5 percent of the OS market was captured by Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), leaving as little as 3 percent for BlackBerry. The analysts hold that hardware business of BlackBerry holds some value depending upon the performance of the company. If BlackBerry is valued at same multiple as Nokia, 0.3x TTM sales, then the value comes to $7.16 billion or $4.10 per share.

The Nokia-Microsoft deal will also pose some challenges for companies like Lenovo, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and HTC Corp (TPE:2498) who will need to develop their own software rather than relying on Android.

Major risks to the PT

Analysts have underlined major risks to the price target such as lack of stabilization in subscribers. BlackBerry 10 has failed miserably to retain subscribers and expand the aggregate subscribers, which could pose a material risk for the company in the future.

Most of the BlackBerry 10 device subscribers go for a lower tiered service plan. There is lack of clarity in the BBM service plan with the network carriers. Researchers are expecting a decline in the service revenue due to these plans, and if subscribers do not add to low service plans in 2014, then the price target would be at risk.

Analysts are expecting BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to keep the prices of BlackBerry 10 phones for 40 percent gross margin. Price target and will be at risk if the situation does not come into play.

CIBC analysts have rated BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) as SectorOutperformer–Speculative with a price target of $14.

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