BlackBerry (TSX:BB)(NYSE:BB) stock is struggling right now. As of this writing, it was down 58% from its January high of $31.47. That’s a pretty steep decline — especially when you consider that BlackBerry’s most recent quarter was arguably a good one. In it, the company’s adjusted revenue and earnings both grew year over year. On top of that, the company recently inked a huge deal with Amazon and settled a lawsuit with Facebook. The news coming out of the company certainly sounds good. So, why this steep decline?
In this article, I will attempt to explain why it happened — arguing that it was not the fault of the company at all but rather the product of a speculative mania its stock got caught up in before the crash. To explain what I mean by that, we need to look at the concept of “meme stocks.”
BlackBerry got pumped as a “meme stock”
“Meme stocks” are stocks that are heavily promoted and discussed on social media and on forum sites like Reddit. In themselves, they have nothing that makes them different from other stocks. A lot of them are companies whose best days are behind them, but that’s incidental. What these stocks really all have in common is simply the fact that they’re extremely popular with a certain subset of investors.
Reddit’s WallStreetBets forum has 9.4 million users and is perceived to have the ability to move markets. It’s plausible enough that it does. Let’s assume conservatively that 10% of WallStreetBets’s users are active on the subreddit. That’s 940,000 people. If they all have $1,000 to invest at a given time, that’s $940 million they can collectively push into a particular stock. If the stock has a market cap of only $1 billion, then that’s going to send it up considerably.
What does this have to do with BlackBerry?
Well, simply put, BlackBerry was once the second most popular stock on Reddit at one point. And it was during that time that it shot up to $31.49. During the meme stock craze, investors on WallStreetBets were actively encouraging each other to invest large sums of money in stocks like BB. BlackBerry got a nice, round chunk of that investment. At the start of the rally, it was just $8.43. The Reddit fueled pumping sent it well above 30. It’s impossible to say exactly how much of the gain the stock posted then was due to Reddit. But it is known that all of the top five Reddit stocks were rallying intensely at that time. I also showed that even with pretty conservative user engagement and funds per user estimates, WallStreetBets could put nearly $1 billion into a stock.
How this explains the 58% crash
The above helps to explain why BlackBerry crashed by 58%.
It’s not actually because the company did anything wrong or posted particularly bad news. Rather, it’s because the speculators who had been pumping it lost interest. Ultimately, all stock prices are products of supply and demand. It stands to reason, then, that if a large, dedicated fan base stops caring about a stock, then that stock will fall in price. Such is the nature of social media-driven market fads: easy come, easy go. That says nothing about BlackBerry as a business. It does contain one lesson, however: be careful when buying into market fads. If you’re late to the party, you could get rolled.
