Shares of Research in Motion (RIMM) are up 92 cents, over 6%, at $15.83, after Jefferies & Co.’s Peter Misek today raised his rating on the stock to Buy from Hold, and raised his price target to $19.50 from $13, the first time since April of 2011 that he has had a Buy rating on the shares.
A couple of factors prompt Misek this morning, including the prospect that RIM might have a viable software business in its “BlackBerry Mobile Fusion” programs for enterprise management of mobile devices, and also what he sees as improving developer and carrier support for the forthcoming “BB10” operating system software release for BlackBerry, which will be publicly unveiled on January 30th.
On the latter score, Misek had written in late November that BB10 seemed to be getting a warmer-than-expected reception from carriers. Today he writes that his “checks” suggest both carriers and software developers are allotting additional resources to BB10:
More recent checks indicate that the carriers have also agreed to volume commitments for the first two quarters post-launch. We have been surprised by the strongly positive initial feedback on BB10 from carriers (who admittedly have every incentive to be bullish). We are a bit puzzled as we expected a more muted response given BB10 is two years late and RIM’s market share has plunged from 20% to 5%. Our theory is that carriers see BB10 as one of their last chances to avoid being locked into a long-term smartphone OS duopoly. Our checks indicate that large app developers are going to put resources into developing BB10 apps. Previously we had thought they would take more of a wait-and-see approach before committing resources. RIM is targeting 70K BB10 apps available at launch. Just this past weekend RIM held a �Port-A-Thon� contest that yielded 15K ported apps. Incentives from RIM for the port start at $100 per app. Although, we believe many of these apps are likely shovelware and add little value to users. Also, RIM is targeting the top 600 apps in major markets, and in an interview with FierceWireless RIM said BB10 will support ~90% of those apps. Even if the apps are not of the highest quality, the 70K headline number should help marketing efforts and compares favorably to BlackBerry App World�s current 90K app count.
More important, Misek thinks that the conversion of the “BlackBerry Enterprise Server” software to a general IT tool for managing corporate email on non-BlackBerry devices, such as Apple‘s (AAPL) iPhone and phones running Google‘s (GOOG) Android software, is “unknown or not well understood,” even though RIM announced its Fusion initiative last April.
Fusion could become a direct competitor to startups doing “bring-your-own-device” management tools such as Good Technology and MobileIron:
We believe that RIM will more broadly market this product after the BB10 launch (so that it has a more compelling hardware offering and is not cannibalizing its BB installed base as much) and after the server upgrade in May. RIM is consolidating its server-side products under BlackBerry Enterprise Service 10, which has a single web-based user interface; however, it has three underlying component parts. BlackBerry Device Service (BDS), which supports PlayBooks and BB10 handsets. Universal Device Service (UDS), which provides mobile device management for iOS and Android devices. BlackBerry Enterprise Server (BES) 5.0.3 and above, which supports older BlackBerry handsets. Currently, BES 5+ has to be installed on its own server while BDS and EDS can be on the same virtual server. RIM plans to launch an upgrade in May 2013 that will combine BDS and UDS into a single component and let it run on the same server as BES 5+. In the mean-time, our checks indicate that corporate IT departments are unhappy about having to manage several different server programs on different physical servers. We also believe that RIM will be open to restarting licensing discussions after the BB10 launch. While we think Samsung is leaning toward owned-IP solutions so that it does not replicate its current reliance on Android, we think other handset OEMs who do not have Samsung�s scale may see the BB10 OS as a way to diversify away from Android.
In conclusion, Misek now thinks there is a close to 30% chance of BB10 being a success, higher than he previously believed, which might put the stock in the neighborhood of a $56 valuation. Scenario number two, a “take-under,” would come about if BB10 should fail, which he gives a 25% chance. And scenario number three, the most likely, with 45% probability, is that “BB10 fails, no acquisition, and continued cash burn leads the stock toward $0.”
As Misek puts it, “The weighted probability of these scenarios equals our new $19.50 target.”
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