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In mid-2020, Keith Gill, who goes by RoaringKitty on YouTube, started sharing his thoughts on video game retailer GameStop on social media platforms, including the r/wallstreetbets subreddit. He posited that because the company was a target of short-sellers like hedge funds, they would have to cut their losses amid a short squeeze, which would drive the stock price higher. Stuck indoors due to the pandemic and thanks to apps like Robinhood that have made trading easy, an army of retail investors soon started to buy GameStop's shares. This resulted in Gamestop's stock price reaching dizzying highs in early 2021 and professional investors scrambling to limit their losses.
And just like that, the first meme stock was born. Many who participated in the short squeeze saw this as a Robin Hood moment where Wall Street veterans were robbed and their riches were shared with individual investors. From there, the meme stock movement gained steam and enveloped other companies such as electric car maker Tesla, technology company Nvidia, data analytics company Palantir, cannabis products company Tilray, and Bed Bath & Beyond.
Meme stocks had a banner year in 2021. GameStop, for example, saw its stock price rise more than 1,000% in January 2021. The meme stock mania wasn't just limited to GameStop. Movie theatre chain AMC Entertainment's stock price hit an all-time high in June 2021, and BlackBerry's share price more than doubled that year. But even as these mom and pop investors kept identifying other companies as meme stocks, none reached the success enjoyed by GameStop and AMC's stock price.
In this article
What is a meme stock?
To better understand meme stocks, let's first look at the definition of meme. Merriam-Webster defines a meme as "an amusing or interesting item (such as a captioned picture or video) or genre of items that is spread widely online, especially through social media."
In short, a meme stock is a company that has gone viral, drawing interest from retail investors. These companies' cult-like following isn't generally attributed to their performance, but to the hype generated on social media and various online forums. Because word of mouth and online conversations are fueling the rise in meme stocks' share price and not fundamentals, the spikes are generally short-lived. Some also refer to these stocks as "Stonks."
In a way, meme stocks are like cryptocurrencies. Early adopters who had an unshaken belief benefited the most, while those who joined out of a fear of missing out (FOMO) didn't see as hefty gains, if at all.
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Should you invest in meme stocks?
It would be preposterous to write off meme stocks simply because they're a risky investment. Traditional investors posit that a company's fundamentals should justify an increase in share price. Individual investors opine that if the majority supports a stock, the higher price will allow the company to raise fresh capital, and thus result in a stronger business.
Pros of investing in meme stocks
Hefty gains
Meme stocks present a massive earning opportunity. As more and more people hop on the investment bandwagon, the price continues to appreciate. If you were one of the retail investors who invested early, you could reap hefty gains in a short period. There have been reports of people minting millions by trading shares of meme stocks when the movement was starting. Gill, who started it all, turned his $53,000 investment in GameStop as of September 2019 to $48 million by the end of January 2021.
Learning lesson
The meme stock movement gave rise to savvy investors, and the saga served as a learning lesson for younger investors. Many who participated started it because they were hunkered indoors, but even as COVID-19 appears to be loosening its grip, new meme stocks continue to be identified.
Cons of investing in meme stocks
Potential for losses
The biggest downside of investing in meme stocks is the potential for losses, especially if you entered late in the cycle. A meme stock's share price is artificially inflated because it's driven not by the company's long-term performance, but by online hype, and there's a likelihood the trend may not last forever.
Volatility
Meme stocks are prone to high volatility and an increase in price will, in most cases, be for the short term. Over a long period of time, passive investing and having a diversified basket of stocks is a time-tested method of accumulating wealth. If you invest exclusively in meme stocks, you're at a greater risk of losing your investment capital or seeing your portfolio underperform.
Stock dilution
Many of these meme stocks took advantage of meteoric stock prices and tapped the capital markets to raise money. To do that, they had to issue fresh shares, meaning anyone who owned the stock saw their ownership trim because the outstanding number of shares increased.
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Where are they now?
GameStop
The meme stop darling capitalized on its higher share price. For reference, at the start of January 2021, GameStop's stock was trading at $17.25. But 20 days later, it was nearing $150, and on January 28 that year, it reached a high of $483 before cratering to about $194. GameStop raised more than $1 billion in June 2021 by issuing 5 million new shares. More recently, it has announced plans for a stock split, designed to result in a lower share price to entice retail investors still on the sidelines. The stock is currently trading at about $123.
AMC Entertainment
AMC was on the verge of bankruptcy as cinemas shuttered during the pandemic. That changed once retail investors set their sights on AMC. The company's stock price reached an all-time high of about $73 in June 2021. Amid soaring valuation stemming from the high-trading volume, AMC raised $2 billion in cash, to be used for acquisitions and paying down debt. The stock is currently trading at about $16.
What regulators think
The meme stock mania received quite a bit of legal scrutiny. Robinhood, which essentially enabled the frenzy, restricted trading in GameStop and a few other meme stocks as trading in these stocks intensified. The company has also so far paid more than $136 million in fines to settle regulators' allegations of wrongdoing.
Gill testified before a U.S. House committee on the meme stock trading frenzy alongside Robinhood CEO Vlad Tenev. Gill's last post on the r/wallstreetbets subreddit was a year ago.
FAQs
Is there a meme stock ETF?
The VanEck Social Sentiment ETF is an actively management portfolio of top-75 stocks based on social media conversations.
Can I expect a windfall by investing in meme stocks?
That largely depends on when you enter the cycle. If you are an early adopter, you could potentially earn a decent return on investment. But if you're a late entrant, you may not make any money at all.
Can I trust what I read on social media about stocks?
There are some Wall Street insiders who would scoff at investors turning to social media like Twitter, Reddit, Instagram and TikTok. The Old School investors feel "new" investors are messing with stocks in a way they do not understand while the New School believes it is righting the balance and giving those with less money to invest a chance. But, as is always the case, investing is always a gamble and the best way to determine if a company is something you should invest in, rely on multiple sources of research to get a full picture.
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The bottom line
Retail investors pulled off a spectacular short squeeze in 2021 in what they see as a David vs. Goliath-esque tale. Whatever their investment strategy, this horde of investors banded together and focused on companies with high short interest. And they succeeded. While many of the meme stocks have given up the gains they accrued, they continue to be a stock market darling. If you're looking to invest in meme stocks, you have to tread carefully.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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