NEW YORK, NY (TheStreet) -- Morgan Stanley downgraded BlackBerry (BBRY) on Wednesday to an "underweight" rating with the view that the Canadian company won't be able to hit its target of $350 million in new software and messaging revenue for the 2016 fiscal year.
"When we initially set our [equal weight] rating in June 2014, we felt the market was too pessimistic on the ability of the company to stem the cash burn and EPS losses," Morgan Stanley analyst James Faucette wrote in the firm's note. "However, we now believe that the pendulum has swung too far in the other direction, and that the market is now too willing to give the company the benefit of the doubt that BBRY will successfully be able to sell its new software and messaging offerings."
Part of the problem, as Morgan Stanley sees it, is that the software and messaging targets provided by BlackBerry CEO John Chen imply that the company can maintain or grow its enterprise customer subscriber base, and convince these customers to spend three times as much as they do now.
"We are skeptical that BlackBerry will be able to achieve that level of success, particularly with a new product platform, new pricing, new go-to market strategy, and with a still very damaged brand," Faucette said.
In addition, BlackBerry sold 2.4 million smartphones during its most recent quarter, but Morgan Stanley believes the company is just breaking even on handset sells. The firm doesn't expect the mobile communications company to improve its handset margins and sales substantially enough to break even on an operating margin basis in the fiscal year 2016.
Morgan Stanley set a $7 price target for BlackBerry, more than 30% less than the company's Tuesday close price of $10.76.
BlackBerry posted revenue of $916 million in its second-quarter fiscal year 2015 earnings report, with a majority of revenue split between its hardware and services business. Software, meanwhile, accounted for just 8% of revenue in the quarter ending August 30, 2014. The company lost 2 cents per share on an adjusted basis in the three-month period, which was much better than originally anticipated and shares are up more than 5.5% since the report.
In pre-market trading, shares of BlackBerry were falling 4.7% to $10.26.
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--Written by Jennifer Van Grove in New York, NY.
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