Earlier this week, BlackBerry (BBRY +1.44%) 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 (AAPL +1.58%) 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 BlackBerry 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 BlackBerry 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 Android phones. With Apple 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 BlackBerry 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 BlackBerry 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.
Can the Q10 perform this well? Heins pointed out in his Bloomberg interview that BlackBerry has a user base of more than 70 million, although many of those are located in lower-income countries, where few people could afford the price tag of the Q10. In the recently ended fiscal year, BlackBerry generated 37.4% of its revenue in the U.S., U.K., and Canada, down from 39.9% in FY12 and 57.5% in FY11. These figures suggest that 30%-40% of current BlackBerry subscribers may live in high-income countries, and could thus be considered likely Q10 upgrade candidates.
Obviously, it is not clear how many of these users will actually decide to upgrade this year. BlackBerry may also target former subscribers, but most of these people have probably committed to iOS or Android by now, making it difficult to lure them back. Nevertheless, I continue to believe that most current high-end BlackBerry users plan to upgrade this year, and this makes 20 million Q10 unit sales a plausible target for FY14. If Heins can deliver that level of sales, BlackBerry bears will be shocked yet again, while shareholders will be delighted. Any upside beyond that would just magnify the effect.
