Are Meme Stocks a Real Investment?

➤ What is a meme stock?

Meme stocks, a term coined for shares of companies riding a wave of viral popularity due to heightened social sentiment, thrive primarily in the online realm, especially on social media platforms.

Online communities passionately engage in extensive research and discussions, shaping the narratives around these stocks.

Discussion threads on platforms like Reddit and posts on X (formerly Twitter) and Facebook often witness fervent discourse and analysis regarding meme stocks.

Despite perceptions of coordinated efforts among meme stock communities to influence share prices, the reality portrays a diverse and unorganized collective of independent investors. Each member holds distinct investment views and preferences.

However, their combined actions occasionally trigger short squeezes in heavily shorted stocks, leading to potential overvaluation compared to traditional technical analysis.

Highlights:

• Meme stocks represent shares of companies that attract online communities fostering narratives and promotion.
• Originating in 2020, meme stocks gained prominence, primarily stemming from the subreddit r/wallstreetbets.
• The rise of GameStop (GME) stands as a benchmark, with its price soaring nearly 100 times over months, fueled by its meme community orchestrating a short squeeze.
• These stocks have birthed their unique language and slang widely used in online forums and social media platforms.
• However, investing in meme stocks carries a heightened risk of volatility, often driven by viral posts across social media platforms.

➤ Understanding meme stocks

Memes, in their digital essence, symbolize cultural elements or ideas spreading rapidly across the minds of people.

Their prevalence surged alongside the internet’s expansion, facilitated by social media platforms that enable the swift transmission of humorous, intriguing, or sarcastic content globally. This lightning-fast sharing potential often catapults such posts into viral sensations.

The evolution of online spaces dedicated to stock discussions paralleled the internet’s growth. In the late ’90s and early 2000s, these forums contributed to the promotion and inflation of dotcom stocks, fueling a bubble that infamously collapsed with profound economic repercussions.

However, the inception of meme stocks took center stage in 2020 through Reddit’s r/wallstreetbets. Diverging from traditional investing boards, WallStreetBets distinguished itself with an unconventional and irreverent tone.

Users within this and similar forums collaborate to pinpoint specific stocks for promotion, actively investing their own funds.

Unlike fraudulent online pump-and-dump schemes designed to deceive investors, the promotion of meme stocks predominantly involves a strategy of buying and holding. This commitment by involved investors, known as ‘strong hands,’ persists even amidst drastic price surges.

➤ GME: The one that started it all

In August 2020, the YouTube persona known as Roaring Kitty, later identified as Keith Gill, delivered a viral prophecy on GameStop Corp. (GME). Gill foretold the potential surge of GME shares from $5 to $50 per share.

He underscored the stock’s remarkably high short interest, predominantly held by hedge funds, hinting at an imminent short squeeze that could propel the stock’s value significantly higher.

Operating under the moniker u/deepF…Value on Reddit’s r/wallstreetbets, Gill was a key figure in this unfolding saga. Not long after his video, investor Ryan Cohen, former CEO of Chewy.com, stealthily amassed an undisclosed volume of GME shares.

Gill acknowledged Cohen’s move on Twitter (now X). Subsequently, in November 2020, it was disclosed that Cohen held a substantial 10% stake in the company.

The stock’s meteoric rise began when Cohen joined GameStop’s board on January 12, triggering a rapid doubling in value within two days—a staggering eightfold increase from the earlier referenced posts by Cohen and Gill.

Come January 2021, Roaring Kitty’s projected short squeeze unfolded dramatically, propelling GME shares to a staggering peak near $500. This frenzied surge was characterized by substantial short-covering and frantic retail buying.

The aftermath saw several hedge funds, the prime targets of the squeeze, facing significant losses, with some even forced to shutter operations.

This paradigm shift in the meme stock concept framed a narrative reminiscent of David versus Goliath, symbolizing a battle against Wall Street elites, favoring the small retail investor.

The momentum behind meme stock activities gained traction during the COVID-19 lockdowns, amplified by the proliferation of zero-commission brokerage apps like Robinhood.

The surge in trading volumes on Robinhood’s platform, notably in meme stocks, triggered trade delays, platform outages, and crashes.

This sparked user outrage, legal actions in the form of class action lawsuits, and regulatory penalties amounting to approximately $70 million in fines and restitution.

➤ AMC, BB, BBBY, and more

While GameStop pioneered the phenomenon, it was far from alone in this unique market trend. Users within the WallStreetBets community swiftly identified additional undervalued stocks facing substantial short interest, aiming to replicate the GameStop-like surge.

AMC Entertainment Holdings Inc. (AMC), a movie theater chain grappling with plummeting profits amidst the pandemic, and Blackberry Limited (BB), an outdated smartphone manufacturer, were among the targeted stocks.

These stocks, too, witnessed rapid and exponential surges in their share prices. The rise of these recognized meme stocks sparked amusement within forums like r/wallstreetbets, as these seemingly outdated companies reemerged with renewed vigor in the stock market.

However, the fate of meme stocks varied. Despite sporadic short squeezes, not all meme stocks enjoyed sustained success.

The landscape of meme stocks expanded to include other names like Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even Robinhood Markets Inc. (HOOD), the platform that facilitated meme stock trading.

➤ Meme stock lingo

Meme stock communities have cultivated a distinct lexicon embedded in their online discourse. Here are some key terms, often accompanied by emojis, commonly employed within these communities:

Apes 🦍: Members of the meme stock community. While some attribute this term to a meme linked to the movie Rise of the Planet of the Apes, others see it as a symbol of the collective unity of individuals challenging the Wall Street elite.

BTFD: An abbreviation for “buy the f***ing dip.” This practice involves purchasing a stock following its price decline, intended to be repeated with each subsequent drop.

Diamond hands 💎🤲: Signifying steadfastly holding onto a stock despite significant losses, driven by unwavering confidence in an imminent price increase.

FOMO: An acronym for “Fear of Missing Out,” representing the anxiety of missing out on the meme stock wave.

Hold the line: A rallying cry to encourage others to maintain diamond hands amidst market volatility.

Paper hands 🧻🤲: A disparaging term directed at individuals lacking conviction, perceived as weak for selling their shares hastily, contrary to the ethos of diamond hands.

Stonks: A humorous misspelling of “stocks,” predating WallStreetBets, often featuring a crudely illustrated figure in a suit, gazing blankly at an upward-pointing arrow indicating a rise in price.

Tendies 🔥🍗: Abbreviation for chicken tenders, symbolizing profits gained from meme stocks. The association with this fast-food item as a representation of profits carries various interpretations.

To the moon 🚀🌙: An expression denoting a stock’s anticipated extraordinary rise, akin to reaching the moon.

YOLO: “You Only Live Once,” promoting the idea of seizing the opportunity to invest in a meme stock without hesitation.

➤ Capitalizing on demand

While meme stocks have notably benefitted investors, day traders, and brokerage platforms, companies themselves have seized the opportunity presented by this viral investment trend.

In response to the soaring prices and sustained demand among individual investors, AMC Theaters’ CEO, Adam Aron, leveraged the heightened valuation.

In 2021, the company initiated a sequence of secondary (follow-on) offerings, generating over $1.5 billion in the first quarter (Q1) from enthusiastic meme stock enthusiasts.

Following suit, GameStop joined the trend in 2021, orchestrating a secondary offering that garnered nearly $1.7 billion. This offering comprised 8.5 million additional shares, with an average price exceeding $200 per share.

However, in 2022, Bed Bath & Beyond announced plans to initiate a secondary offering of 12 million shares, capitalizing on the inflated value spurred by meme stock promoters. Unfortunately, following the announcement, the stock experienced a substantial decline.

➤ Meme stocks and short selling

A defining trait of meme stocks, particularly in their early phases, is their inclination to be heavily shorted names. This translates to a significant level of short interest in the stock, implying that a substantial portion of the company’s outstanding shares has been sold short.

Short selling involves the act of selling shares that one does not possess, with the expectation of repurchasing them at a lower price later. Essentially, it’s a wager on the stock’s price decrease.

To execute this strategy, the seller must borrow shares from a long position holder to initiate the sale. As more shares are sold short, the pool of available shares for borrowing diminishes.

Consequently, when a stock becomes challenging to borrow, even the most determined short seller may encounter obstacles in securing shares for their trades.

Meme stocks commonly find themselves in the realm of scarcity, marked by a high short-interest ratio and a scarcity of available shares for borrowing.

Short squeeze

Stocks sold short, often leveraged through borrowed shares, present a precarious scenario for short sellers as the stock’s price ascends. As the stock value climbs, short sellers encounter mounting losses, triggering potential margin calls from brokers to cover these paper losses promptly.

In due course, short sellers might find themselves incapable of retaining the short position due to insufficient funds, compelling them to repurchase the shares at a higher price, effectively closing their positions.

When numerous short sellers face this circumstance simultaneously, it exerts additional upward pressure on the stock’s price. This phenomenon, termed a short squeeze, intensifies the stock’s price surge as more shorts rush to exit their positions to mitigate losses.

GME squeeze

GameStop (GME), an early contender in the meme stock realm, exemplifies how retail investors strategically exploited a heavily shorted stock through a short squeeze.

Facing declining foot traffic and dwindling revenues, GameStop became a prime target for short sellers, resulting in a short interest exceeding 100% of the shares outstanding. Reddit and other investment forums echoed discussions on the potential for a short squeeze.

Notably, influential investors like Scion Asset Management’s Michael Burry and Chewy co-founder Ryan Cohen took substantial long positions.

This sparked a chain reaction as retail investors flocked to purchase shares and call options, propelling the stock’s price skyward. As the price surged, it attracted the attention of prominent figures like Elon Musk and venture capitalist Chamath Palihapitiya, amplifying the momentum.

GameStop’s stock catapulted due to a massive short squeeze, inflicting significant losses on major hedge funds shorting the stock. Within less than six months, the stock price soared from under $5 per share to a staggering $325 by January 2021.

➤ Meme stocks FAQ

Why meme stocks?

The concept of a meme encapsulates an idea that swiftly spreads among people. As the internet burgeoned, memes evolved into humorous social media posts and viral videos.

Meme stocks earned their moniker because discussions about them proliferate rapidly across social media platforms and online forums.

These stocks often cultivate communities that fuel the hype and elaborate on the initial meme, devising specific terms and symbols associated with the stock.

Meme stock ETF?

Roundhill Investments launched a meme stock-focused ETF in December 2021, trading under the ticker symbol ‘MEME’. The MEME ETF features a portfolio equally weighted with 25 stocks, selected based on social media popularity and market sentiment.

The securities are initially assessed by a “meme” score, calculated from mentions on specific social media platforms over a trailing 14-day period, considering their short interest.

The top 25 firms by this measure form the portfolio, which is reevaluated and rebalanced twice a month.

Additionally, single stock ETFs have recently emerged, offering leveraged long or short positions on individual stocks. While only a few have been approved for trading, some encompass meme stocks such as Tesla and NVIDIA.

Are meme stocks real investments?

Meme stocks are indeed real stocks listed on exchanges and available for trade. Yet, critics contend that their price performance hinges more on entertainment value and speculative allure than on fundamental factors, akin to games found in casinos.

Meme stocks today?

Many of the meme stocks that witnessed soaring prices in 2021 have considerably declined in 2022, with some even dipping below their initial levels. However, stocks like GameStop remain elevated, albeit significantly lower than their peak highs.

The meme stock craze, once perceived as short-lived, continues to persist months later.

Communities rallying around meme stocks propelled brick-and-mortar retailer Bed Bath & Beyond (BBBY) to extreme heights in the summer of 2022, witnessing a 314% surge for a brief period before plummeting.

Retail investors, particularly younger demographics, continue to be drawn to the latest meme stock trends. Viewed as a means to yield significant returns in a short duration, especially amidst rising housing costs and inflation, meme stocks retain appeal.

However, they maintain substantial volatility and risk, potentially exposing retail investors to significant losses if market conditions falter.

➤ Final Thoughts

Meme stocks emerged as a fervent investment trend among day traders and retail investors in early 2021, triggering short squeezes on prominent stocks like GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC).

Termed ‘meme stocks’ owing to their viral traction akin to internet memes, these stocks garnered dedicated online communities that aimed to amplify and hype their potential, despite lingering doubts about the fundamentals of these companies.

🔥 Daily Inspiration 🔥

I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.

— Warren Buffett