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BlackBerry: How It Can Rise Nearly 50%

NEW YORK ( TheStreet) -- BlackBerry (BBRY - Get Report) shares have performed well this year, rising 26% and outpacing rivals such as Apple (AAPL) and Google (GOOG). One analyst thinks there's plenty more room to run.

Morgan Stanley analyst Ehud Gelblum upgraded shares of the Canadian technology firm to "overweight" from "underweight" and raised his price target to a Wall Street high of $22, as he believes the gross margins from BlackBerry 10 will add to earnings this year. Gelblum noted that BlackBerry 10, which was announced in late January, should help the company's overall margins, as it transitions away from BlackBerry 6. The Z10, BlackBerry's touchscreen phone, carries a margin around 20%, and he believes the Q10 could be as high as 30%, almost Apple-like.

"Since we now believe gross margin can continue to expand in the near-term on the device mix-shift, even after accounting for the steep decline in higher margin services revenue, we are adopting a new SOTP (sum of the parts) methodology replacing the one we adopted last June, and therefore we are raising our SOTP-based price target to $22 from $10," Gelblum wrote in his note.

He values the services part of the business at $5.56 a share, and that's assuming the troubled segment reaches a break-even point in the third quarter of next year. Services, inventory, and BlackBerry's network operations now account for an additional $5, $4, and $2 in value a share, respectively, with the higher gross margins adding $1 a share. The $12 increase in BlackBerry's business segments caused the SOTP price target to be raised to $22.

Though the price target is being raised and the stock is being upgraded, Gelblum noted he does not believe BB10 is likely to emerge as a third viable operating system in the United States, where Google's Android and Apple's iOS dominate. It's merely being done because of existing BlackBerry customers (of which there are 79 million), upgrading from older platforms to BlackBerry 10. That isn't to say that there can't be room for a niche player in the market, it's just that Gelblum believes BlackBerry will never effectively take on Android and iOS domestically, or globally. Gelblum is modeling a 3.5% market share globally for BlackBerry in fiscal year 2015, a far cry from Android or iOS.
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