Earlier this week, Research In Motion Ltd (NASDAQ:BBRY) CEO Thorsten Heins shocked the world with some bold predictions. First, at a Milken Institute conference on Monday, Heins argued that tablets will be obsolete in five years. Given that Apple Inc. (NASDAQ:AAPL) reported 65% year-over-year growth in iPad unit sales in its most recent quarter — and still lost market share — Heins’ prediction may seem bizarre. However, his point was that smartphones are becoming more and more powerful, and so eventually there may be no advantage to having tablets with dedicated processing power. Instead, you could have a portable screen connected to a smartphone that does all the “heavy lifting.”
I think Heins may be exaggerating the usefulness of a tethered screen compared to stand-alone tablets, but his argument for tablets’ demise is at least plausible. However, I want to focus on a second bold prediction that Heins made, which is of much greater significance for Research In Motion Ltd (NASDAQ:BBRY) shareholders. In an interview with Bloomberg, Heins stated that he was very optimistic about BlackBerry’s new Q10 smartphone, which just began arriving in stores in the U.K. and Canada this week. In fact, Heins predicted that BlackBerry would sell “several tens of millions of units” of the Q10. If the company can achieve this goal, BlackBerry stock is likely to rocket higher this year.
Q10 expectations are mixed
When Research In Motion Ltd (NASDAQ:BBRY) formally launched the new BB10 platform, it unveiled its first two smartphone models: Z10 and Q10. Z10 is an all-touch device, while Q10 has a physical QWERTY keyboard. Analysts generally agreed that Z10 would be a niche product, at least initially. People who are looking for a robust touchscreen user interface have already migrated to the iPhone or Google Inc (NASDAQ:GOOG) Android phones. With Apple Inc. (NASDAQ:AAPL) and Google having already locked many users into their respective ecosystems, BlackBerry clearly faces an uphill battle to regain market share. Last quarter, which included roughly one month of Z10 sales in the U.K., Canada, and a few other markets — but not the U.S. — BlackBerry sold 1 million Z10 units, which was in line with most analysts’ expectations.
By contrast, there has been significant debate about the Q10’s potential. Bulls such as Peter Misek of Jefferies have claimed that Research In Motion Ltd (NASDAQ:BBRY) is now building more than 2 million BB10 phones per month, with Q10 phones making up the majority. By contrast, many observers — such as Mark Sue of RBC and James Faucette of Pacific Crest — are more skeptical, expecting strong initial demand for the Q10 model to drop off quickly. Meanwhile, perma-bears such as Brian Blair of Wedge Partners believe that BlackBerry will sell fewer than 10 million BB10 units this year.
Can the Q10 deliver?
Overall, analyst expectations for the Q10 are mixed but skew bearish; on average, analysts expect a brief bounce in sales that will quickly dissipate. In light of this consensus, if Research In Motion Ltd (NASDAQ:BBRY) meets Heins’ projection with 20 million to 30 million Q10 unit sales this year, BlackBerry stock is likely to move significantly higher. Assuming that BlackBerry earns a profit of just $175 per device (based on a gross margin of 35% and wholesale ASP of $500), each additional 1 million unit sales would increase the company’s FY14 EPS by $0.25. Even if Q10 sales total just 20 million (the minimum consistent with Heins’ “tens of millions” prediction) that would exceed some analysts’ forecasts by 10 million or more, leading to substantially higher-than-expected earnings.