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Why BlackBerry's 'Dream' Is Over ... For Now

NEW YORK (TheStreet) -- BlackBerry (BBRY - Get Report) shares have experienced a bit of a rebound in recent weeks, following positive remarks from new CEO John Chen who tried to instill confidence in an investor base that seriously doubts the company's future. But that's too much too soon for a company that hasn't gotten any better.

Oppenheimer analyst Ittai Kidron downgraded shares to "underperform" from "perform," noting that the jump in share price since CEO Chen took over is overly optimistic, and there's the potential for 20% to 30% downside from these levels.

"CEO John Chen's downsizing and enterprise/software focused strategy's pragmatic, but we're still cautious on his ability to successfully turn around the business," Kidron wrote in a note. "Despite operational changes, we expect BlackBerry's device shipments and subs to erode quickly before stability is achieved with the new strategy."

Shares of Waterloo, Ontario-based BlackBerry were lower in premarket trading, off 2.4% to $8.55.

In December, BlackBerry announced dismal third-quarter results, losing 67 cents a share on an adjusted basis, on $1.2 billion in revenue. Analysts were looking for revenue of near $1.6 billion.

Given the rockiness and volatility surrounding the company, as well as the stock, Chen's plan to save the company, which includes a get back-to-basics strategy, involves a lot of execution risk, according to Kidron, who titled his note, "Sell the "Dream," Face "Reality"; Downgrading." He noted that even if Chen and his management team are successful "BlackBerry would likely exit much smaller and a niche player."

BBRY ChartBBRY data by YCharts

Chen's message to refocus the company on emerging markets has been largely all talk at this point, with investors betting on optimism. However, nothing has been implemented so far, Kidron noted, and that can be detrimental for investors looking to get into the name at these levels.

"We see a disconnect in what is likely to be a challenging, multiple-year reclamation project, and investors' more typical multi-quarter bottom-line view. We believe the mismatch will eventually weigh on the shares," Kidron wrote in the note.

Business prospects are not getting any better, and as seen in the company's fiscal third-quarter they are getting worse. BlackBerry said it sold only 1.9 million smartphones in the third quarter, most of those running on BlackBerry's older BB7 operating system. There were paltry sales of its new Z10 and Q10 devices, which run on BlackBerry's newest operating system, BB10.

The one benefit to the company's business is that it still has around 80 million users, and its expansion into Google (GOOG) Android and Apple (AAPL) iOS with its BBM messaging system has been seen as a positive for the company. But there's been little in the way of revenue growth.

Investors have been placing a lot of faith in Chen, who came to BlackBerry in November, following a failed sale to Fairfax Financial Holdings and the ouster of former CEO Thorsten Heins. Chen, who successfully turned around Sybase, has a "good track record," according to Kidron, and he's "tapping a management team he's successfully worked with in the past in turning around and selling Sybase."

Ultimately, BlackBerry may eventually be sold, whether it's in pieces or as a whole, with Chen leading the charge. Investors' optimism surrounding the company has been heightened in recent weeks, and there may ultimately be an endgame for BlackBerry. For now though, Kidron is warranting caution at these levels. He said that investors may be "reminded of the 'reality' through the year, shaking confidence. Sell ahead."

--Written by Chris Ciaccia in New York

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