Why BlackBerry Has 20% Downside

• Shares of BlackBerry Ltd BBRY have gained 9 percent in the last three months.
• Credit Suisse’s Kulbinder Garcha maintained an Underperform rating on the company, with a price target of $6.
• The company faces inherent challenges in turning around its services and hardware business and may be forced to close them, Garcha noted.

Blackberry is expected to report F3Q16 revenues of $489 million, down 38 percent y/y, and gross margins at 40.2 percent. The company’s EPS for the quarter is expected to be -$0.11.

Analyst Kulbinder Garcha noted that Blackberrty is faced with a challenging transition wherein services continue to witness an accelerated decline. He wrote, “We see continued pressure and forecast FY16 revenues of $793mn dropping to $435mn by FY17.”

The sustainability of Blackberry’s software business remains doubtful, given the unpredictability of the IP licensing revenues, Garcha stated. The company is expected to post software revenues of $497 million in FY16 and of $609 million in FY17.

Although the company has become aggressive on the M&A front, the quality of some of the acquisitions could create significant integration risk.

Poor handset sales, with continued fixed costs, are exerting pressure on the gross margins of Blackberry’s hardware business. The Credit Suisse report added that Blackberry plans to launch a new Priv smartphone that will run on Android and not its own operating system.

“Assuming shutting down the hardware business by the end of FY16 and winding down services business by the end of FY17, we arrive at NAV of $3.2bn ($6 per share), suggesting ~20% downside from the current market price,” Garcha mentioned.