Meme Stocks Are Going 'To the Moon' Again. But for how long?
Should you invest in meme stocks?
After three years, meme stocks have again captured the market's attention with dramatic surges. However, the sustainability of this speculative frenzy remains uncertain. Should you consider investing in meme stocks?
Meme Stocks Are Going 'To the Moon' Again
GameStop (GME.N) has soared by over 200% in a week, driven by renewed activity from Keith Gill, known as "Roaring Kitty." This revival inevitably reminds the public of the bullish trends of meme stocks in 2021, led by the same stock—back then, its share price nearly increased thirtyfold within a month.
Despite GME share price pulling back after reaching a peak of $48.75, the stock still saw an overall upward trend over the past month, including an annual return of 154%(while Bitcoin's annual return "only" surpassed 129%). The resurgence has also lifted other representative meme stocks, including the theatre chain AMC Entertainment(over 130%), SunPower Corp(up 60%), Plug Power (up 19%), and Virgin Galactic (up 22%). This momentum highlights the continuing influence of meme stocks on market dynamics and investor sentiment. However, this explosive growth pattern, followed by sharp declines, can create a highly unpredictable investment environment.
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How does a Meme Stock Work?
Meme stocks are equities that experience rapid and volatile price movements driven by online communities, primarily on social media platforms like Reddit, X, and YouTube. The prices of these stocks are strongly influenced by social sentiment and hype on platforms rather than fundamental financial analysis.
Meme stock price fluctuation typically follows a four-phase cycle. Initially, retail investors on forums identify undervalued stocks with high short interest, driven by social media buzz. As excitement builds, more investors join, causing rapid price surges fueled by sentiment of fear of missing out(FOMO) and media coverage. The stock peaks as speculative enthusiasm rises, and volatility rises as early investors begin to cash out. Finally, selling pressure and fading hype lead to a decline, with panic selling exacerbating the downturn.
GameStop is a typical example of a meme stock: it surged more than 20 times in January 2021 but lost almost 90% of its gains by mid-February.
The 2021 Surge and the 2024 Revival📈
The meme stock phenomenon first appeared in early 2021. Several struggling companies became the focus of meme stock trading, driven by online hype and social media discussions. The spark for the frenzy was GameStop, a US video gaming retailer facing operational difficulties. It was expected by many institutional investors to continue its stock price decline in January. However, Keith Gill, a CFA also known as Roaring Kitty, steadfastly supported GameStop on Reddit and made significant stock purchases. The buzz on Reddit caused a massive influx of individual investors, and the stock price of GameStop rose dramatically📈. Its stock price (closing price) skyrocketed from $4 at the start of the year to an all-time high of $81 on January 28, leading to substantial losses for hedge funds shorting the stock. Within a couple of weeks, social media users flocked to the Wall Street Bets forum to join the conversation and participate in the hype. Other stocks, like AMC Entertainment (AMC) and BlackBerry(BB), became targets of rampant speculation—and their prices fluctuated accordingly.
In May 2024, these three meme stocks experienced a significant surge again. GME's stock price soared nearly 200% to $64 before dropping below $40. This resurgence was driven by the return of Keith Gill, who sent his first social media posts in three years. However, the mania from last week's flash rally ground to a halt; both GME and AMC have since seen their shares decline sharply, resulting in significant market value losses📈📉.
The immediate impacts of the meme stock surge phenomenon in 2021 and 2024 include significant short-term volatility and short squeezes, and institutional and retail investors may experience both windfalls and severe losses.
Should you invest in meme stocks?
Investing in meme stocks may seem enticing, especially given the initial hype and potential for quick gains driven by social media buzz. However, this form of trading is fraught with risks that can make it a perilous venture for most investors, especially individuals.
The above graph compares the market capitalizations of GameStop (GME), AMC Entertainment (AMC), and Blackberry (BB) at their peak in 2021 to their current values as of May 2024. As can be seen from the chart, GameStop, which reached a peak market cap of $11.32 billion in 2021, now sits at $6.8 billion, with a 39.9% decline⬇️. Blackberry also experienced a significant fall, from $5.31 billion to $1.73 billion, marking a 67.4% decrease⬇️, while AMC's situation is even more drastic, with a plummet from $13.97 billion to $1.3 billion, a staggering 90.7% drop⬇️.
All in all, investing in meme stocks may seem enticing, especially given the initial hype and potential for quick gains driven by social media buzz. However, this form of trading is full of risks that can make it a perilous venture for most investors, primarily individuals. Meme stock investors must be aware of risks and consider whether the potential rewards are worth suffering the significant uncertainties.
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