BlackBerry Ltd (BBRY): Raymond James Forgot One Teeny, Tiny, Important Fact

BBRY - BlackBerry Ltd (BBRY): Raymond James Forgot One Teeny, Tiny, Important Fact

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Raymond James Analyst Steven Li just told clients to “Stop worrying about hardware — only positives from here on,” after upgrading BlackBerry Ltd (NASDAQ:BBRY) to “Outperform” with a $10.50 price target.

BlackBerry Ltd (BBRY): Raymond James Forgot One Teeny, Tiny Important Fact

Li essentially said hardware does not matter, and asked clients to consider the potential in licensing a “secured version” to Android manufacturers to produce “enterprise ready” hardware. This of course suggests that no matter what happens in BlackBerry’s dwindling hardware business, BBRY stock is in great position due to its fast-growing software and services business.

BlackBerry, an enterprise services company, created more than $160 million in first quarter revenue from software and services. It also guides that the segment will grow 30% in 2016. Roughly three-quarters of this business is recurring revenue. Therefore, Li believes if BBRY focuses on services and software — delivering mobile security and device management services, among others — that its business will thrive.

Given these beliefs, Li tells clients there is no need to worry or consume yourself with hardware sales, which have shown no light at the end of the tunnel despite BlackBerry’s recent adoption of Android operating system in place of its own operating system.

BBRY Stock: The Ugly Truth

Last year at the BoxWorks Convention, Apple Inc. (NASDAQ:AAPL) CEO Tim Cook unveiled that its enterprise operations were a $25 billion business for Apple. Cook said something during his presentation/interview that Li seemingly misses in his analysis, or did not consider. Cook said, “People don’t really buy enterprise smartphones any more than they buy enterprise cars. They buy cars and phones.”

For the past few years, BlackBerry has been trying to sell itself as an enterprise company, with Chen saying shortly after his tenure begun that 80% of the company’s 50 million users are enterprise customers. But according to Apple, enterprise and consumer go hand-in-hand; both want an all-in-one experience, not one or the other.

That said, the most successful hardware makers in the world realize this fact. BBRY seemingly does not. So, how successful would an enterprise ready solution really be? If BlackBerry were to drop hardware and become a software and services company exclusively, it seems the more popular hardware makers would reject its services due to what Cook said, realizing there is no “enterprise car.”

Moreover, Li does not seem to consider that much of BlackBerry’s software and services success is piggybacked from its hardware business. Sure, BlackBerry does have customers that are not BlackBerry users, but one must believe a large portion are in fact its own hardware users as well. BlackBerry does not disclose enough information about its software and services business to know for sure.

Therefore, if BBRY were to do away with hardware entirely, it seems much of Li’s case would be invalid. Yes, software and services are currently growing organically, and have a strong recurring business model, but without the hardware, investors have to assume that many of the few BlackBerry users left would go with Apple, Samsung, LG, Nexus, etc. — all of which have their own security and software services.

Bottom Line on BlackBerry

At the end of the day, I see essentially no value in BBRY stock unless BlackBerry can figure out hardware.

It is apparent that hardware is a much bigger piece of BlackBerry’s investment outlook than Li or many BBRY longs give it credit for. As a result, there is no reason to own BlackBerry stock unless we see legitimate signs of life from its hardware unit, because that implies longevity for the company’s software and services.

People don’t want a consumer and enterprise phone. They want one that does both. Tim Cook touched on this. The idea that consumers will want an enterprise-ready, secured Android for enterprise and then another for personal use is the same notion that has been killing BBRY for the past five years.

They still don’t seem to get it.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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