What Are Meme Stocks, and Are They Real Investments? – Investopedia
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
A meme stock refers to the shares of a company that have gained a cult-like following online and through social media platforms. These online communities can go on to build hype around a stock through narratives and conversations elaborated in discussion threads on websites like Reddit and posts to followers on platforms like Twitter and Facebook.
Meme stock communities can thus greatly influence the prices of those shares through coordinated efforts to, for example, initiate short squeezes in heavily shorted names. As a result, meme stocks can become apparently overvalued relative to their fundamentals yet remain elevated for prolonged periods of time as members of the meme stock community keep their prices propped up.
Meme stock communities have also developed a glossary of informal slang and market terminology such as “diamond hands” (strong hands that will not sell even on dips), “tendies” (profits, jokingly referring to how many chicken tenders one can buy with them), and “to the moon” (anticipation of extremely above-average returns).
A meme is an idea or some element of popular culture that spreads and multiplies across people’s minds. Memes gained increasing prevalence and relevance as the internet and social media grew, allowing people to rapidly spread humorous, interesting, or sarcastic videos, images, or posts to others around the world. The rapid and multiplicative effect of sharing such posts could make them go viral.
With the internet, chat rooms and discussion boards devoted to investing and promoting stocks also arose. In the late 1990s and early 2000s, these sites helped promote and drive up the prices of so-called dotcom stocks—a bubble that famously burst in spectacular fashion.
Meme stocks, however, didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets. Unlike its predecessors and other investing message boards, WallStreetBets became known for its unconventional and often irreverent tone. In this and other forums that have popped up since, users work together to identify target stocks and then promote them, while also putting their own money to work. Unlike online pump-and-dump schemes aimed at defrauding unwitting investors, the promotion of meme stocks largely involves buying and holding with the above-mentioned strong hands even after the price spikes.
In August 2020, the YouTube persona Roaring Kitty posted a future viral video laying out the case for why shares of brick-and-mortar video game retailer GameStop Corp. (GME) could soar from $5 to $50 per share. (Roaring Kitty’s real name is Keith Gill was also on Reddit as u/deepF…Value and active on the subreddit r/wallstreetbets.) In the video, he explained that the stock had among the highest short interest in the market, largely with short positions held by hedge funds—and that these funds would need to cover their positions in the event of a massive short squeeze, driving the stock much higher.
A few days later, the former CEO of Chewy.com and investor Ryan Cohen purchased an unknown amount of GME stock, which Gill acknowledged on Twitter. In November 2020, it became public knowledge Cohen owned a 10% share in the company. On Jan. 12, he joined the board and the stock rose rapidly. By closing two days later, the value doubled; an 8x increase from the price at the time of Cohen’s and Gill’s previous posts.
Then, in January 2021, the short squeeze that The Roaring Kitty had suggested took place in earnest, with the price of GME shares exploding to nearly $500 amid a frenzy of short-covering and panic buying. The main victims of the squeeze ended up being a handful of hedge funds, some of which were forced to shut down due to heavy losses. As a result, the meme stock concept adopted a David vs. Goliath or Robin Hood connotation of taking from the rich Wall Street elite and rewarding the small retail investor.
Meme stock activity was given a great boost from bored individuals stuck at home during COVID-19 lockdowns combined with zero-commission brokerage apps like Robinhood. In fact, Robinhood saw overwhelming trading volume in meme stocks at times, causing multiple trade delays, outages, and platform crashes. This led to user outrage along with class action lawsuits as well as regulatory fines and restitution of approximately $70 million.
While GameStop was the first successful meme stock, it was not the only one. WallStreetBets users quickly identified other downtrodden stocks with heavy short interest to boost. These included AMC Entertainment Holdings Inc. (AMC), the movie theater chain that saw flagging profits amid the COVID-19 pandemic, and Blackberry Limited (BB), the outmoded smartphone maker. Both stocks also saw their shares rapidly increase by multiples. Indeed, as these became recognized meme stocks, members of r/wallstreetbets and similar outlets began to acknowledge the humor (for the “lulz”) of seeing such legacy companies emerge from the ashes in the stock market.
Some meme stocks did not fare as well as others, even with the occasional short squeeze. Other meme names have included, among others, Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even the meme stock enabler Robinhood Markets Inc. (HOOD).
Meme stock communities have developed a specific lingo used in their posts online. Some of these terms include (along with emojis used to denote them online):
While meme stocks have been a boon to individual investors, day traders, and brokerage platforms, companies have also capitalized (quite literally) on the meme stock phenomenon. As a result of sky-high prices and persistent demand for shares among individual investors, AMC Theaters CEO Adam Aron took advantage of the elevated valuation and engaged in a series of secondary (follow-on) offerings in 2021, raising more than $1.5 billion in the first quarter (Q1) of that year from voracious meme stock buyers.
GameStop followed suit in 2021, raising nearly $1.7 billion via a secondary offering of 8.5 million additional shares at an average price of more than $200 per share.
In 2022, Bed Bath & Beyond announced intentions to sell 12 million shares in a secondary offering as meme stock promoters pumped the value of its stock; however, the stock fell steeply following the company's announcement to do so.
One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names. This means that there is a lot of short interest in the stock, or that a large proportion of the company’s outstanding shares have been sold short.
Short selling is when somebody sells shares that they do not own, hoping to buy them back at a lower price. It is thus a bet that prices will go down. That seller must borrow shares from somebody who is long the stock in order to sell them. As more and more shares are sold short in this way, there are fewer shares left available to borrow. Once a stock becomes hard to borrow, even the most motivated short seller may be unable to do so.
Meme stocks often happened to be hard to borrow, with a high short interest ratio.
Stocks are sold short on margin (because they involve borrowed shares). As the price of the shorted stock rises, the short seller will begin to experience losses. These losses must be covered in a timely fashion, often prompted via margin calls, whereby the broker demands funds to make up for those paper losses.
Ultimately, a short seller may run out of available funds to hold on to the short and will be forced to buy back the shares at a higher price and close out the position. If many shorts are forced to cover at once, it adds additional upward pressure on the stock’s price as they are all forced to buy the stock and cover at ever higher prices. This is known as a short squeeze, and it accelerates a stock’s price increases as more and more short sellers are forced to bail out to cut their losses.
GameStop, among the first meme stocks, is a prime example of how the retail investor community identified a highly shorted stock and used a short squeeze to work in their favor.
GameStop (GME) became a heavily shorted stock due to a decline in foot traffic at malls and dwindling revenues. The short interest, therefore, had grown to over 100% of the shares outstanding. The case that a short squeeze could be precipitated was then developed and touted on Reddit and other investment forums. In addition, big investors, such as Scion Asset Management’s Michael Burry and Chewy co-founder Ryan Cohen, also took long positions.
From there, the number of retail investors buying shares and call options snowballed, driving up the price. The price increase drove out some short sellers early on as it attracted various big-name investors and public figures, such as Elon Musk and venture capitalist Chamath Palihapitiya.
GameStop's stock price then surged due to a massive short squeeze affecting some major hedge funds that were short the stock and forced to sell to cut losses. As mentioned above, the stock price went from less than $5 a share to $325 (by January 2021) in less than six months.
A meme refers to an idea that spreads rapidly among people. With the advent of the internet, memes began to take the form of humorous social media posts and viral videos. Meme stocks are so-named because ideas about them, too, spread rapidly online on social media and web forums. Meme stocks also see communities built around them that perpetuate the hype and elaborate on the original meme, inventing specific terminology and symbols to accompany the stock.
Roundhill Investments came out with a meme stock-focused ETF in December of 2021 under the ticker symbol 'MEME'. MEME features an equal-weighted portfolio of 25 stocks based on social media popularity and market sentiment. Eligible securities are initially given a social media activity or “meme” score—that is the number of times a firm, or its ticker, are mentioned on specific social media platforms over a trailing 14-day period, with consideration paid to their short interest. The top 25 such firms are included in the portfolio, which is re-examined and rebalanced twice a month.
Single stock ETFs have also recently been introduced, which provide leveraged long or short positions on a single stock. Only a small number of these have been approved for trading so far, but do include some meme stocks like Tesla and NVIDIA.
Meme stocks are actual stocks listed on exchanges and available for trade. In that sense they are real. However, critics argue that their price performance and appeal have little to do with their fundamentals and much to do with their entertainment value as speculative playthings, much like casino games.
In general, many of the meme stocks that saw sky-high stock prices in 2021 have come down quite a bit in 2022, sometimes to below where they started. Others, notably GameStop, remain elevated, although still far lower than the all-time highs.
While some thought that the meme stock craze would be short-lived, the phenomenon remains in-force months later. For instance, in the summer of 2022, meme stock communities have pumped the brick-and-mortar retailer Bed Bath & Beyond (BBBY) to extreme levels, where it was up 314% for a short period before crashing back down.
Retail investors are also likely remain keen to pick up on the latest meme stock. Dominated by younger investors, meme stocks are still seen as a way to generate outsized returns in a short period of time, especially in the face of rising housing costs and inflation in general. But, meme stocks also remain very volatile and risky, and retail investors are likely to be the ones to experience the most losses if it all comes crashing down.
So-called meme stocks became a hot investment theme for day traders and retail investors early in 2021, resulting in short squeezes on hot stocks at the time such as GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC). Named after the virality of internet memes found on social media, these stocks saw online communities form around them to boost and hype their prospects, even though meme company fundamentals remained questionable.
Roaring Kitty. "The Big Short SQUEEZE From $5 to $50? Could GameStop Stock (GME) Explode Higher?? Value investing!,"
Aug 21, 2020. (YouTube Video)
Twitter. "Roaring Kitty, Aug. 28, 2020, 11:24 PM."
U.S. Securities and Exchange Commission. "Subject: Maximizing Stockholder Value by Becoming the Ultimate Destination for Gamers."
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Aug. 23, 2020 – Jan. 14, 2021."
GameSpot. "Pet Food Billionaire Joins GameStop's Board Of Directors."
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Jan. 17, 2021 – Feb. 04, 2021."
Financial Industry Regulatory Authority. "FINRA Orders Record Financial Penalties Against Robinhood Financial LLC."
CBSNews. "AMC, Nokia and Other 'Meme Stocks' Targeted By Reddit's WallStreetBets."
MarketWatch. “The Meme-Stock Moment Turns 1 — Unofficially — and Welcomes a Sophomore Class of Tickers.”
The New York Times. “AMC Cashes in on Meme Stock Mania, Raising $587 Million.”
Yahoo! Finance. "GameStop Corp. (GME): Historical Data," Select Time Period, "Jun. 17, 2021 – Jun. 24, 2021."
GameStop. "GameStop Completes At-The-Market Equity Offering Program."
Bloomberg. "Bed Bath & Beyond’s Share Sale Tests Boundaries of Retail Frenzy."
Vox. “The GameStop Stock Frenzy, Explained.”
Roundhill Investments. "$MEME The Meme Stock ETF."
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