BlackBerry (NYSE:BB) stock was one of many heavily-shorted names that saw a tremendous boost during last month’s meme stock mania. But, as shares have fallen more than 50% from recent highs, is there opportunity here with this “blast from the past” tech name?
Yes and no. On one hand, this company, best known for its once-widely used smartphones, isn’t the dinosaur many may still see it as. Pivoting to business lines with stronger long-term prospects, this company is far from being in long-term decline.
On the other hand, while it has potential, it’s likely more than accounted for in today’s still-inflated price for BB stock. Speculators may be now cashing in their chips.
But, it’s going to be a while before this stock pulls back toward a more reasonable valuation.
And, what would be a more reasonable price for BlackBerry? Given that its growth is moderate but not earth-shattering, I would wait until shares head back to the $5 to $7 per share trading range before considering it a buying opportunity.
BB Stock: Megatrend Exposure vs. Premium Valuation
As InvestorPlace’s Tom Taulli wrote Feb. 9, until last month’s madness, BlackBerry shares struggled for nearly a decade. In the early 2010s, FAANG powerhouses like Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Apple (NASDAQ:AAPL) disrupted its once-ubiquitous smartphone platform. Yet, much like other once-great tech equipment names, like Nokia (NYSE:NOK), this isn’t the same company you vaguely remember from a decade ago.
Instead, BlackBerry is today largely a security software services provider. Also, as Taulli pointed out, the company has moved big into the fast-growing Internet of Things (IoT) space. To top it all off, the company has moved into artificial intelligence and autonomous vehicle spaces as well.
This exposure to many megatrends is a positive. But, will it translate into long-term growth for the company? That’s where the problem lies. Investors may point to its megatrend exposure as justification for its current rich valuation (more below).
Yet, not only is BlackBerry more an also-ran in these fast-growing areas. Looking at near-term projections, this company isn’t exactly setting the world on fire. In the coming fiscal year (ending February 2022), sales are set to rise about 9.2%. Decent, but not impressive. In addition, earnings per share (EPS) is set to fall a bit, from 18 cents in FY21 (ending February 2021) to 15 cents in FY22.
With this in mind, the stock’s current valuation (price-to-sales ratio of 7.8x) does not look sustainable. And, the key reason why shares will give up almost all of their recent gains, as Reddit traders continue to cash out.
Why BlackBerry’s Heading Back to $7 Per Share
Following its short-squeeze spike, it may seem like BB stock is settling at a new trading range (between $10 and $15 per share). However, while the retail investor mania has peaked, it’s still playing out as of this writing. Those who got in early have likely exited their positions.
But, those who got in too late? Some may be accepting their losses and moving on. Others may be still holding, hoping for BlackBerry to spike yet again. However, what we saw late last month isn’t going to repeat itself in the near term.
As the days/weeks progress, and there’s little sign of an encore, those holding the bag may finally decide to throw in the towel. And, that means further declines for BB stock. Sure, at today’s valuation, this stock trades on par (on a price/sales basis) to peers like Proofpoint (NASDAQ:PFPT).
But, unlike this company, Proofpoint expects much higher levels of sales growth in the coming year. BlackBerry’s brand name may be more familiar. But, that’s hardly a reason for it trade at the same valuation as stronger rivals.
Instead, you should get a discount to account for these factors. What do I think is a more reasonable valuation? Something along the lines of 3x to 4x trailing 12 month (TTM) sales. In other words, $5 to $7 per share.
Those price levels are where I think BlackBerry is more reasonably priced. And, it’s where I think shares will head to once recent events have played out.
Like Other Meme Stocks, Sit Tight for Now
Those early to the party made fast money on meme stocks like BlackBerry. But, those who came in a bit too late? Many are sitting on heavy losses. If these speculators start giving up, as hopes for a second parabolic move fade, expect shares to fall back toward a more reasonable valuation.
The company may be making the right moves by targeting opportunities in IoT, AI, and AV technology. But, until it shows meaningful success, it’s not worth buying BB stock at today’s still rich valuation.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.