Research In Motion Ltd (BBRY), Apple Inc. (AAPL): Analysts Are Still Too Pessimistic About BlackBerry’s Profitability

Margins could surprise on the upside
BlackBerry is unlikely to achieve the iPhone’s gross margin profile. Historically, this has exceeded 50%. However, high-end Research In Motion Ltd (NASDAQ:BBRY) devices should still generate gross margins of 30% to 40%. While Gelblum projects an average selling price of $450 for the Z10 and Q10 devices, this seems overly pessimistic. The iPhone 5 — which sells for the same subsidized price as the Z10 at American carriers — is thought to have a wholesale ASP of as much as $600. BlackBerry is offering an unsubsidized price of $599, which probably means that the wholesale ASP for the Z10 is around $500.

Based on a production cost of $300 to $350 (in line with Gelblum’s estimate and slightly higher than the iPhone 5’s production cost due to Apple Inc. (NASDAQ:AAPL)’s superior economies of scale), Research In Motion Ltd (NASDAQ:BBRY)’s gross margin would be 30% to 40%, or $150 to $200 per device. I expect a similar margin profile for the upcoming Q10 phones.  Based on my estimate of 20 million high-end device sales in FY14, BB10 device sales alone would generate $3 to $4 billion of gross margin in the coming year. By contrast, BlackBerry’s operating expenses totaled just over $1.1 billion last quarter ($4.5 billion annualized ). This would leave its high-margin service revenue of roughly $1 billion per quarter as almost pure profit.

Even bullish analysts seem to be underrating BlackBerry’s prospects for returning to profitability this year. Twenty million smartphones represent a small percentage of the high-end smartphone market (ASP >$400) — perhaps 5% to 6%. BlackBerry would not have to lure a large proportion of iPhone or Android users to hit that sales target, in light of the likely upgrade demand from current high-end BlackBerry users. If Research In Motion Ltd (NASDAQ:BBRY) can sell 20 million high-end smartphones this year (Z10 and Q10 sales combined), that should provide sufficient economies of scale to drive gross margin to the 30%-40% range. This could create significant upside to the analyst community’s modest profit expectations, helping BlackBerry shares continue to rally.

The article Analysts Are Still Too Pessimistic About BlackBerry’s Profitability originally appeared on and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple and BlackBerry, and has the following options on BlackBerry: long Jan. 2014 $13 calls. The Motley Fool recommends and owns shares of Apple and Google.

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