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WallStreetBets Keeps Inflating the BB Stock Balloon: Is It Time To Sell?

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Jan. 28 2021, Published 8:06 a.m. ET

On Jan. 27, BlackBerry stock rose 32.7 percent and closed at $25.10. The stock surged despite RBC Capital Markets analyst Paul Treiber downgrading the stock after a WallStreetBets-fueled rally. Treiber said BlackBerry’s outlook has changed little and its fundamentals don't justify the significant surge in BB stock since November 2020. Is BlackBerry stock a sell? What can investors expect from the company?

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BlackBerry stock has rallied more than 278 percent this year, including a 33 percent jump on Jan. 27. In after-hours trading that night, the stock fell 10 percent after Discord removed Reddit’s WallStreetBets server due to hateful and discriminatory content.

BlackBerry stock on WallStreetBets

In the last five trading days, BlackBerry stock has surged nearly 96 percent as online posts urging traders and investors to buy shares triggered a new wave of interest in the stock. Members of the popular "r/WallStreetBets" Reddit group upped their bets on BlackBerry and united to achieve mutual gains. GameStop and AMC Entertainment Holdings have also seen significant gains in the past few trading sessions.

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BlackBerry Stock Sell
Source: BlackBerry Facebook

Why RBC downgraded BlackBerry stock

On Jan. 19, RBC Capital Markets analyst Paul Treiber downgraded BlackBerry stock from "sector perform" to "underperform." The analyst maintained his target price at $7.50, which implies a 12-month decline of around 70 percent from the stock's closing price of $25.10 on Jan. 27.

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In a research note, Treiber highlighted that BlackBerry's valuation was at a multiyear high but that its fundamental outlook had not materially changed. Earlier this month, BlackBerry sold 90 smartphone patents to Huawei and settled a dispute with Facebook. Treiber argued that these one-off wins don’t justify the company’s $7 billion surge in market capitalization. He wrote that the fundamental justification “requires improved outlook for either BlackBerry’s QNX/BTS automotive business or recurring IP licensing revenue.” 

On Jan. 27, Paul Steep of Scotiabank also downgraded BlackBerry stock from "sector perform" to "underperform." The analyst maintained his target price of $8.50 on the stock.

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BlackBerry Stock Sell
Source: Koyfin

BB stock trading halted

On Jan. 27 at 9.54 a.m. ET, the Investment Industry Regulatory Organization of Canada announced a temporary suspension of trading in BlackBerry shares. The move comes amid continued volatility due to social media chatter.

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BB stock is overvalued

BlackBerry stock looks overvalued compared with other software companies based on its valuation. BB's next-12-month price-to-earnings multiple is 251.0x, whereas VMware's and Palo Alto Networks' are 21.17x and 57.56x, respectively.

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BB stock's outlook is unclear

In 2016, BlackBerry switched its focus from mobile phone handsets to cybersecurity, AI, and internet-of-things solutions. However, the new focus has been difficult for BlackBerry, which had yet to prove that it can grow as a software company. The company has been losing market share to larger software security competitors, especially in unified endpoint management, and BlackBerry’s sales have fallen 95 percent since their 2011 peak. We'll have to wait to see if it can still turn around.

Is BB stock in a bubble?

Investors should note that BlackBerry, once a beaten-down stock, has come roaring back in 2021 for no apparent reason. In the last five trading days, BB stock has risen from $12.50 to $25.10. It appears to be in a bubble, as its significant surge is certainly not based on fundamentals. According to CNN, analysts' median target price for BB is $8.25, which implies a 67 percent discount from its closing price on Jan. 27.

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