Meme stocks, once the talk of Wall Street, are making a dramatic comeback. The recent resurgence was triggered by Keith Gill, the influential figure behind the 2021 Gamestop short squeeze, who broke his three-year silence on his social media account, Theroaringkitty, on May 12, 2024.
Gill’s return had an immediate impact, propelling Gamestop’s stock price to surge by 74.4% the following day. This renewed interest in Gamestop also had a ripple effect, boosting the share prices of various other meme stocks and crypto meme tokens.
Meme stocks are characterized by their social media-driven hype, leading to frenzied buying by retail investors despite the companies’ weak fundamentals. Online communities, particularly the Reddit forum WallStreetBets, coordinate buying and selling efforts to influence stock prices, often leading to significant market volatility.
The phenomenon of meme stocks has created a strong disconnect between stock prices and the underlying companies’ actual values. Gamestop, a video game retailer struggling to adapt in an era dominated by digital downloads and online commerce, is a prime example. The company’s preliminary first-quarter 2024 results highlight its ongoing challenges, with net sales expected to fall between $872 million and $892 million—a stark 29% decline from the $1.24 billion reported in the same quarter last year. Despite aggressive cost-cutting measures, Gamestop is anticipated to report a net loss of $27 million to $37 million for Q1 2024.
Gamestop’s attempts to restructure and pivot towards an online-focused model face stiff competition from retail giants like Walmart and e-commerce leaders such as Amazon. This competitive pressure is reflected in its projected earnings performance, with estimated earnings per share of just $0.06 by the end of 2026. Consequently, Gamestop continues to attract short sellers, with short interests accounting for 25.6% of the company’s total float as of May 15.
On May 12, Gamestop’s stock was trading at 590 times its estimated 2024 earnings—a valuation far from justified by its fundamentals. For comparison, Nvidia’s current price-to-earnings (P/E) ratio is around 88 times. This discrepancy underscores the irrational nature of Gamestop’s recent rally, driven more by market sentiment than by any substantial improvement in its business model.
The same logic applies to other meme stocks like AMC and Blackberry, which also suffer from weak fundamentals and continue to report losses. Their P/E ratios are currently in negative territory, further illustrating the disconnection between their stock prices and actual earnings.
Beyond the stock market, similar rallies have been observed in crypto meme tokens. The GME token’s price surged by an astonishing 3,730% to $0.0196 on May 15, despite having no official affiliation with Gamestop. Other tokens, such as “Gil,” “Roar,” and “Kitty,” were created on the Solana network to capitalize on the meme stock hype, yet they lack any inherent value and are highly speculative.
While some investors may profit from the initial surge in prices, many find themselves caught in the hype, too late to exit when the excitement fades. The GME token price, for instance, had plummeted by 87.5% from its peak by May 26, highlighting the extreme volatility of such assets.
Unlike company stocks, which require approval and listing on a stock exchange, tokens can be created by anyone, adding to their speculative nature. These tokens, often collectibles with no physical assets backing them, are prone to dramatic price swings and speculative bubbles.
The 2021 Gamestop saga serves as a stark reminder of the risks associated with chasing meme stocks and tokens. Keith Gill’s meticulous research initially demonstrated Gamestop’s potential value, convincing many to invest. Today, however, the reasons for investing in meme stocks and tokens are often far less substantiated, driven by mere social media posts and fleeting market trends.
Investing without thorough research and due diligence is akin to gambling. While some proponents of meme stocks and tokens may advocate holding onto positions despite losses, hoping for eventual rebounds, this strategy can lead to significant financial exposure to assets with little or no intrinsic value. Investors are advised to exercise caution and avoid getting caught up in the speculative frenzy.