BlackBerry (TSX:BB) Stock Downgraded by RBC (TSX:RY)

A Reddit-users-led rally allowed BlackBerry to soar to great heights, but RBC has downgraded the stock, and the rally could be short-lived.

The last few days at writing have seen some prolific stock market moves fueled by Reddit users from the subreddit r/WallStreetBets. The users had been discussing less-popular stocks Gamestop and BlackBerry (TSX: BB)(NYSE: BB) and sought to change the tide with these two stocks.

The discussion went viral, and retail investors became market movers, as they began buying shares from the two companies. The stock market went wild, as BB’s and Gamestop’s valuations shot up. Hedge funds are typically the price movers on the stock market and were caught wrong-footed by this move.

The resulting move led to BlackBerry rallying by almost 270% between December 29, 2020, and January 27, 2021.

The Reddit-fueled rally

Companies like Gamestop and BlackBerry have attracted short-sellers in recent years. The flood of retail investors after the Reddit users went viral led to BB benefitting massively in a short time on the stock market. With over 2.2 million members on the r/WallStreetBets community, it was enough to cause a significant stir in the stock market.

Members of the subreddit were hoping that they could capitalize off the short squeeze. However, the rally was short-lived. BlackBerry has been the target for short-sellers for a while, because the Waterloo-based tech company does not have the fundamentals or technicals to support the uptick.

RBC downgraded BlackBerry

Analysts from Royal Bank of Canada Capital Markets already downgraded BlackBerry shares to underperform amid the rip-roaring rally. RBC analyst Paul Treiber said that the company’s fundamental outlook did not change due to the rally, and it does not support the massive increase in the BB’s valuation.

Some analysts tried justifying the rally as momentum that was already long overdue for BB. However, the sudden dip in its valuation suggests otherwise. BB shares are down by more than 41% at writing from its January 27 high of $32 per share.

A company’s stock price determines its potential to grow in revenue, earnings, or cash flows. BlackBerry has no positive news in any of these regards to indicate a potential growth. For a stock to move by more than 30% in a day, the news should reflect significant revenue growth for the next 12 months.

The stock market rally for BlackBerry might have seemed hopeful. However, it was only led by rookie investors who enjoy free trading on platforms like Robinhood. The popular trading platform has since restricted its users from buying more BB and Gamestop shares. It is allowing users to sell the shares they own but not purchase any more.

There has been a class-action lawsuit filed against Robinhood for this move, and it is too soon to determine how the situation will develop.

Foolish takeaway

BlackBerry is not a bad company for tech-inclined investors to consider adding to their portfolios. The company provides endpoint security software and services to laptops, cars, mobiles, and other Internet of Things (IoT) devices. However, experienced investors know that it is important to buy stocks at the right price point.

The current frenzy might continue to cause more price fluctuations for BB on the stock market. You can consider investing in its shares, but there is a risk that the valuation will decline further and result in losses. Patience could be a good virtue right now.

Fool contributor Adam Othman has no position in any of the stocks mentioned. David Gardner owns shares of GameStop. The Motley Fool recommends BlackBerry and BlackBerry.

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