BlackBerry Just Has Too Many Headwinds, Macquarie Starts Coverage At Underperform

Macquarie has initiated coverage of BlackBerry Ltd

with an Underperform rating and a target price of $6.90, saying the company has "too many headwinds." Macquarie is concerned on BlackBerry's high margin Service business "going to zero," and the viability of Handset business and Messenger platform. Though the software and services business remain strong, it may not able to offset the existing headwinds. Analyst Gus Papageorgiou noted that the company's high margin Service business (36 percent of revenue) is going to zero over the next 2-3 years. "Last year the company's service access fees, which we estimate have gross margins in the 80% range, made up 36% of revenue. This revenue stream is going to zero over the next 2-3 years, and we do not expect the software business to grow rapidly enough to compensate," Papageorgiou wrote in a note. In addition, the analyst highlighted that the company continues to lose ground in handsets (39 percent of revenue) with the future existence of BB10 in doubt. "Although the company continues to lower its costs in this area, given its lack of scale and (thus far) inability to carve out a successful niche within the Android ecosystem, we remain skeptical over the viability of the handset business," the analyst elaborated. Furthermore, Papageorgiou noted that BlackBerry Messenger, also known as BBM, is lagging behind competition and the company's reluctance to integrate bot technology into the platform raises questions over the viability of this line of business in the future. On the positive side, the analyst expects the software and services business to remain strong in fiscal 2017, with a growth rate of more than 30 percent. The company also expects 70 percent of the pure software revenue stream or $429 million to be recurring. The analyst expects 2017 EPS of $(0.37) and 2018 EPS of $(0.39) and the near-term catalyst for the stock is the reporting of first quarter results on June 24. "The ongoing decline of the service business and unsure future for handsets provide strong headwinds for the stock. Eventually we believe the software and services business will emerge as a growth & profit engine, but that is likely several quarters away. We would avoid the shares in the mid-term," Papageorgiou noted. At the time of writing, shares of Waterloo, Canada-based BlackBerry were up 0.30 percent to $6.70 on Nasdaq.