BBRY has had a nice run recently. The stock is currently trading at $15.75, up from juast $6.30 in September 2012. As stocks run up many analysts up their forecasts to play ‘catch up’ (and vice versa on way down). Morgan Stanley has just upgraded Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) from to Overweight from Underweight. The price target is boosted from just $10 to $22 a share by the analysts.
Their thesis is that the mix-shift of devices away from BB6 and to BB7/BB10 should meaningfully drive gross margin and Device ASPs – 2 key metrics of smartphone stock success – following a deep dive analysis into the components of BBRY’s gross margin structure including, most importantly, the negative impact of BB10 on the services business. They now believe gross margin can continue to expand in the near-term on the device mix-shift, even after accounting for the steep decline in higher margin services revenue, They are adopting a new SOTP methodology replacing the one adopted last June. Further details below:
The new $22 SOTP assumes ZERO value for BBRY’s Device business, but that it can now support itself after FQ3’14, leaving a residual Services value of $2.8B or $5/share that was previously assumed would be fully consumed by a perpetual cash burn in Devices. Morgan is Also adding $3/share for inventory, no longer comprised of high-risk BB6 devices.
The mix-shift AWAY from BB6 and TO BB7/BB10 will likely lift Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s GM to 33.0% in Feb from 31.6% in Nov ’12 – going to 34% for FY’14 vs Street of 30% – as BB7 carries <10% GM and the Z10 debuts at ~20%+ while the Q10 could be closer to 30%. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) also benefited from a mix-shift to higher margin Lumia’s that drove its smartphone GM to 18% in Q412 and from 8.8% in Q3 and 16.0% in Q212.
Morgan still expects service rev to fall sharply as BB10 grows, assuming only half of BB10 ent customers use BES10 for MDM at an avg. ARPU of $3/month. Service revenue is expected to fall 28% in FY14 and 58% in FY15 to $2.8B and $1.2B, respectively, down from $3.9B in FY13.
Morgan Stanley still believes that Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) is unlikely to emerge as a strong 3rd OS and that BB10 primarily sells into existing BB7 users, not Android or iOS converts.
However, in contrast to prior reports, Morgan Stanley now believe there may be room in the handset market for niche midrange players and a base valuation for these vendors as Win8 has lacked traction, and even LG Electronics Inc. (KRX:066570) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) appear to be seeking alternate OS strategies.
