In a few words:
- Meme stocks’ refers to stocks that are experiencing rapid increases in price and trading volume, primarily fuelled by Internet communities and trends on social media rather than by traditional financial indicators.
- The phenomenon of meme stocks that raged in 2021 has recently resurfaced, once again with stocks of companies like GameStop and AMC.
- In the short term, countless factors can cause a stock to fluctuate, sometimes explosively. Over the long term, however, a stock will always end up tracking that company’s earnings per share.
- Speculating on memes is like spending an evening at the casino. In both cases, you can make a quick buck. But eventually, you are almost certain to lose your stake.
Speculative waves sometimes sweep away the entire stock market (late 1990s?), or certain sectors such as cannabis in 2018, SPACs in 2020, and “meme stocks” in 2021.
I had fun asking some questions about this “meme” phenomenon at ChatGPT and here is part of the answer I got. I highlighted a few key words.
“The term ‘meme’ originally referred to any idea, behaviour, or style that spreads within a culture, often through imitation. However, when referring to ‘meme stocks’, it refers to stocks that are experiencing rapid increases in price and trading volume, primarily fuelled by Internet communities, trends on social media, and online forums, rather than by traditional financial indicators or fundamentals”.
The phenomenon of meme stocks raged in 2021. We tend to want to forget this period of confinement linked to COVID-19. At that time, many people working at home had become stock speculators, “day traders”. Combine the craze for stock speculation with the popularity of social networks, particularly the Reddit platform, and you have the potential to explode stocks on the stock market.
Now add to this the fact that the stocks in question are often stocks that are widely sold short. Selling a stock short involves selling a stock that you do not own in the hope of buying it back later at a lower price thus pocketing a profit and you obtain a potentially explosive cocktail.
I will take the example of GameStop because it has recently resurfaced as an extraordinary “meme” stock. Here’s how its stock performed in 2021 as the meme stock craze raged:
At the end of 2020, GameStop stock was worth $4.71. On January 25, 2021, 25 days later, it reached a high of $120.75! However, as ChatGPT indicates, this meteoric rise was based on no fundamentals.
Besides GameStop, stocks of companies such as AMC, Blackberry, Nokia and Bed Bath & Beyond (the latter of which went bankrupt in 2023) have also fallen prey to a large wave of speculation in 2021. In each case, we are talking about practically moribund companies whose prospects are bleak and which were largely sold short.
However, it seems that the “meme” phenomenon has recently resurfaced. On May 13, the stock appreciated by 74% to close the day at $30.45. The next day, the stock saw a maximum increase of 113% to its high of the day ($64.83). For its part, AMC shares appreciated by 78% during the day of May 13, and reached a maximum increase of 129% on May 14. Apparently, this frenzy was started by a few messages published on X by Mr. Keith Gill, the one who brought the world’s attention to GameStop in 2021.
In the short term, countless factors can cause a stock to fluctuate, sometimes explosively. Over the long term, however, a stock will always end up tracking that company’s earnings per share.
Speculating on memes is like spending an evening at the casino. In both cases, you can make a quick buck. But eventually, you are almost certain to lose your stake. Personally, although I make it a point to never set foot in a casino, I would prefer the casino to speculating on a meme stock. At least you have the chance of getting one or two free drinks there.
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