Meme stocks are back – but you shouldn’t chase them
When market interest fades and speculative bubbles burst, their values can plummet quickly
GAMESTOP is back on the radar after Keith Gill, the man behind its infamous short squeeze saga in 2021, broke his three-year silence on his X account Theroaringkitty on May 12, 2024.
His return caused Gamestop’s stock price to skyrocket, closing 74.4 per cent higher on the second day.
Gill’s reappearance on social media also had a broader impact, boosting the share prices of various meme stocks and crypto meme tokens.
Meme stocks refer to companies that gain hype through social media or Internet forums, causing their share prices to spike due to frenzied buying by retail investors. Many of these companies are heavily shorted by hedge funds because of their weak fundamentals.
However, online communities, such as the popular Reddit forum Wallstreetbets, coordinate buying and selling efforts to influence stock prices.
Strong disconnect
As a result, meme stocks can achieve elevated prices regardless of the underlying companies’ actual values.
Gamestop, widely regarded as the first meme stock, is a video game retailer struggling to adapt in an era dominated by online commerce and digital downloads.
Its focus on selling video games in physical stores led to a significant decline in its business.
The company’s preliminary first-quarter 2024 results underscored its challenges, with net sales expected to be between US$872 million and US$892 million – a stark 29 per cent drop from the US$1.24 billion reported for the same quarter last year.
Despite aggressive cost-cutting measures, Gamestop is still expected to report a net loss of US$27 million to US$37 million for 1Q24.
Although Gamestop is restructuring to pivot towards a more online-focused model, it faces stiff competition from mass merchants such as Walmart and e-commerce giants like Amazon.
This competitive pressure is reflected in its earnings performance, with estimated earnings per share of only US$0.06 as of the end of 2026.
Gamestop’s weak fundamentals explain its continued appeal to short sellers.
On May 15, short interests accounted for 25.6 per cent of the company’s total float at 64.8 million open positions.
Based on the closing price on May 12, Gamestop’s stock would be trading at 590 times its estimated 2024 earnings. To put this in perspective, Nvidia’s current priceearnings (P/E) ratio is around 88 times.
This suggests that Gamestop’s recent rally is irrational as it is not supported by any substantial improvements in its fundamentals, and it is trading at an exorbitant P/E ratio that is not justifiable.
The same logic applies to other meme stocks such as AMC and Blackberry, whose businesses continue to incur losses and whose P/E ratios are currently in negative territory.
These stocks show a strong disconnect between their share prices and their actual earnings.
Beyond the stock market, rallies were also observed in crypto meme tokens.
The GME token’s price skyrocketed by 3,730 per cent to US$0.0196 on May 15.
Although the token borrows Gamestop’s stock ticker, it has no official affiliation with Gamestop, and its price spike was driven purely by market sentiment.
Similarly, tokens such as “Gil”, “Roar”, and “Kitty” were created on the Solana network to capitalise on the hype.
These tokens were created purely based on the sudden interest in meme stocks, or Gill and his online persona. Given their lack of underlying value, they often end up worthless.
Don’t fall victim
While some investors can profit from the immediate interest and price surges, the majority find themselves caught in the hype, too late to exit when the excitement fades.
As at May 26, the GME token price had already plummeted by 87.5 per cent from its peak, highlighting its extreme volatility within just two weeks.
Unlike company stocks, which require approval and listing on a stock exchange before trading, tokens can be easily created by anyone.
While their decentralised nature increases liquidity and ease of trading, this also introduces significant risks.
These tokens are essentially collectibles with no physical assets backing them, making them highly susceptible to dramatic price swings and speculative bubbles.
Those who experienced the
Gamestop saga in 2021 should remember that when market interest fades and speculative bubbles burst, the values of these assets can plummet quickly.
In 2021, Gill conducted meticulous research to demonstrate Gamestop’s potential value, persuading investors to buy in.
Today, however, people’s reasons for investing in Gamestop or meme tokens have become even more simplistic – such as a mere post on Gill’s X account. And now history repeats itself.
Investing without research and due diligence is akin to gambling. While proponents of meme stocks and tokens may advocate holding onto positions despite heavy losses and buying the dip in hopes of eventual price rebounds, we advise investors to steer clear of the momentum-chasing game.
When a company’s fundamentals fail to support further share price gains or a token shows no underlying value, this strategy can only result in increased exposure to assets with little or no value.