Cormark upgrades BlackBerry to BUY, raises target to $20

On CNN’s Piers Morgan Tonight yesterday, BlackBerry CEO Thorsten Heins reiterated his comments earlier this week that the iPhone was a dated product.

“I think they are falling behind with the user interface,’ said Heins, who noted that the company is seeing a trend of people who left BlackBerry for Android and iOS devices returning.

Is sentiment changing about BlackBerry’s chances? Yesterday’s surprise upgrade by Morgan Stanley, who, as late as November, felt the company’s new OS had little chance to succeed, is one sign that it might be.

Cormark analyst Richard Tse says BlackBerry’s story will play out in two stages. In the short term, he says, near term drivers such as channel fill will make the company’s fiscal 2014 numbers better than consensus expectations. He now expects BlackBerry to be profitable in the coming year. While fiscal 2015 will be tougher, he says, the company’s stock will then likely be driven sentiment and expectations, which he thinks will improve in the face of upward revisions. In a research update to clients this morning, Tse upgraded BlackBerry to a BUY from his previous HOLD, and raised his target price on the company to $20, up six dollars from his previous target of $14.

With the share price of BlackBerry rising above its net tangible asset value, which he pegs at $14, Tse says BlackBerry is now a higher volatility story, and for that reason he also added a “speculative” risk rating to the stock today.

Tse says BlackBerry’s upcoming fourth quarter results, due on March 28th, will provide little insight into its real progress. He says the quarter will be distorted by the wind-down of BlackBerry 7 devices, which are now being marketed primarily to emerging markets. Tse believes that about 45% of the devices the company sells in fiscal 2014 will be BlackBerry 10’s, with an average sale price of $500. This will increase the company’s overall average sale price, he says, from $256 to $342. The Cormark analyst believe an expected decline in service revenue will be offset by a combo of enterprise service fees and existing BlackBerry 7 and older devices.

And what about the the launch of BlackBerry 10 launch? Is it too early to declare it a success? Tse says the uptake of the Z10 has been robust in its initial launch markets and, according to his industry sources, several existing carriers customers already selling the Z10 have been consistently reordering new units, in some cases multiple times. The Cormark analyst says the fact that BlackBerry has a channel of 650 carriers in 175 countries suggests to him that the channel fill once BlackBerry 10 is up and running globally “could be meaningful”.