For a prominent company that's frequently in the news, BlackBerry (NYSE:BB) is one of the most misunderstood stocks in the market today. Too much attention focuses on the company's past missteps -- which allowed Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) to rapidly overtake it -- rather than BlackBerry's future prospects. Similarly, now that the new BB10 OS has come to market, too many people are focusing on the success or failure of the Z10 (BlackBerry's first BB10 device) rather than the ecosystem's overall potential.
To be "successful," the Z10 would need to sell perhaps 2 million units per quarter -- just a tiny fraction of Apple's iPhone sales or Samsung's Galaxy S series sales. However, even that level of sales is not necessary to justify a higher valuation for BlackBerry, because the Z10 is just a small part of BlackBerry's future. The much more important Q10 smartphone -- equipped with BlackBerry's signature QWERTY keyboard -- is just hitting the market now. Furthermore, BlackBerry CEO Thorsten Heins has already revealed that lower-cost BB10 smartphones will come to market later this year, probably in the fall. Extremely low market expectations and a strong product roadmap will most likely combine to generate strong returns for BlackBerry investors.
The investment case for BlackBerry is straightforward. First -- and most obviously -- the stock trades for $15, which is below book value. In other words, the company is priced to never earn a profit in the future and eventually go bankrupt. This is a big change from 2011, when the stock peaked above $70, or 2008, when BlackBerry shares briefly traded for more than $140:
To put it another way, for the past year, investors have been able to buy BlackBerry stock at prices that had not been seen since the company was a small start-up.
Second, BlackBerry has a competitive product again. The BB10 operating system is great for multitasking and includes several unique features that may appeal to current iPhone or Android users. Many people already claim that iOS is getting stale and that Apple has lost its touch for innovation since Steve Jobs passed away. More recently, Samsung's Galaxy S4 has underwhelmed many reviewers, who see it as a great phone, but not a big improvement over the SIII.
In all likelihood, most iPhone users will stay within the iOS ecosystem, and most Android users will stay within Android going forward. But consumer desires for something "fresh" could drive a significant number of people to BlackBerry over the next couple of years. This may get BlackBerry to only 10% market share, but the smartphone market has grown tremendously since the original BlackBerry went out of fashion. Today, having 10% market share would involve having BlackBerry sell more phones than it did at the peak of its popularity.
Loyal user base
Lastly, BlackBerry has an extremely loyal high-end user base of 20 million to 30 million (as well as a larger group of less-profitable subscribers with low-end phones). These users will almost all upgrade this year, and most of them will continue to prefer QWERTY phones. (To put it another way, why would anybody in the U.S. still be using a BlackBerry today, unless they've been waiting to upgrade to the Q10?) This fact seems underappreciated among Wall Street analysts, and strong sales of the Q10 in the next few quarters will probably surprise most analysts and investors, driving the stock higher.
Risky, but not too risky
Like most technology stocks, BlackBerry is a fairly risky investment. Changing consumer tastes, high competition, software glitches, and the like all have the potential to negate BlackBerry's potential. That said, BlackBerry trades for less than book value, and the company is likely to be profitable this year because of high upgrade demand from existing users. These factors mitigate much of the risk in owning BlackBerry today.
Of course, it is possible that iPhone and Android users are already so locked in to their ecosystems that they won't consider switching even if they do get frustrated with their phones. It's also possible that Microsoft (NASDAQ:MSFT) and its partners will soon figure out how to build and market a Windows phone successfully, and thereby grab the third spot in the smartphone world. Nevertheless, BlackBerry has a small but loyal user base to build on, an innovative new OS, and a massive addressable market. This should be more than enough to make current shareholders very happy.
Fool contributor Adam Levine-Weinberg owns shares of Apple and BlackBerry and also has long January 2014 $13 calls on BlackBerry. The Motley Fool recommends Apple and Google and owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.