In two short weeks, users on Reddit — a popular internet forum — have pushed GameStop (NYSE:GME), BlackBerry (NYSE:BB) and AMC (NYSE:AMC) stock to shockingly high peaks. Never mind that all three firms expect revenues to shrink next year. As long as their stocks kept going up, Redditors seemed happy to pile in.
But all that came crashing down on Thursday when Robinhood announced a blanket ban on trading these stocks. With all three down roughly 50% from their peaks, will any of them recover?
The answer is, of course, that only BlackBerry will. Though the former smartphone maker lost its handset empire years ago, its cybersecurity software looks set to dominate the Internet of Things (IoT) and connected vehicles for the next decade. It might be a bumpy ride, but here’s why BB stock is the next “millionaire-maker.”
BB Stock: What’s Not to Like?
Over the past several years, BlackBerry has quietly emerged from near bankruptcy thanks to turnaround CEO John Chen and his team. Since selling off its handset business, the once-ubiquitous smartphone maker turned its attention to cybersecurity.
In fact, the company now has its operating systems in 175 million vehicles. Many top-10 car manufacturers rely on BlackBerry’s software to run everything from assisted driving to vehicle entertainment. BlackBerry also dominates IoT cybersecurity, where it’s cinched up 96% of the Enterprise IoT threat market. Gartner, a technology research firm, has also awarded BlackBerry’s software first place in Unmanaged/BYO use cases since 2016.
No one, however, seemed to take notice. Though BlackBerry’s profits have slowly stabilized, its shares have languished as hotter startups stole the limelight.
But all that changed for BB stock in November.
Wall Street Meets Reddit’s Wall Street Bets
In November, investors started taking notice of Wall Street Bets (WSB), a Reddit forum about people’s riskiest bets. By mid-January, three of the biggest winners — GameStop, BlackBerry and AMC Theaters — had added over $50 billion to their combined market capitalizations. Rarely has Wall Street seemed so confused on how to handle an inflow of investor money.
But the infusion of cash also had a darker side. As retail investors gleefully forced Melvin Capital and other hedge funds to cover at a massive loss, market-makers struggled to keep up. By the time GameStop hit $480, buyers found it near-impossible to trade options or short shares. Robinhood’s decision to ban trading today was the final nail in the coffin, sending shares spiraling down.
The dislocation will also hurt the three companies financially. AMC and BlackBerry both have significant convertible debts, so rising stocks raise the risk of debtholders cashing out. In theory, if prescient debtholders exercised BlackBerry debentures at the $28 peak, their $6 strike prices would have meant $22 profits on 60.8 million shares. The total cost to BB stock shareholders? $1.34 billion. And AMC’s $600 million debt would have looked even worse.
Volatile markets also hinder companies from raising new capital. Though companies with high share prices can usually tap equity markets for more funding, no bookrunner can realistically raise money quickly enough without dislocating market peaks.
To make matters worse, Blackberry only has 34 million shares sold short — a small 6.25% fraction of its total float. That makes the company particularly susceptible to a bear raid — a case where investors (in this situation, angry Reddit WSB users) gang up to short the company. In an age where regular investors have the power of the internet (and combined pocketbooks to match), the ride of any “meme stock” is going to get rough at best.
Should You Buy BB Stock?
Still, however, BlackBerry will emerge as the strongest of the three “meme stocks.” GameStop and AMC operate in dying businesses.
For example, in November, both Microsoft’s (NASDAQ:MSFT) Xbox and Sony’s (NYSE:SNE) PlayStation released diskless versions of their consoles. That effectively cuts GameStop out of the lucrative used-games market.
Similarly, while moviegoers might temporarily return to AMC once the pandemic ends, the rise of streaming networks means the movie theater’s best years are probably behind it.
Both companies have missed the boat on in-home streaming. And no matter how much they try to pivot to e-commerce or online streaming, they’re extremely late to the party. Companies like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have far larger pocketbooks and years of head start.
Of course, BlackBerry still has a lot to prove. But its work in a growth industry gives it the “most likely to succeed” award. Today, its fair value likely hovers around $15 to $20 or higher, depending on how the driverless vehicle revolution unfolds. So, in the words of Wall Street Bets users, make sure you have hands of diamonds and hold on tight to BB stock. It deserves a place in a high-quality/growth portfolio.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
