What is a Meme Stock?
A meme stock is a stock that is highly popular among retail investors on social media platforms such as Reddit, Stocktwits, Twitter, and Facebook.
- Meme stocks are stocks with a compelling narrative that are hyped up and popularized by retail investors on social media platforms.
- The most well-known meme stocks include GameStop and AMC Entertainment Holdings.
- Meme stocks are extremely volatile, and their prices can skyrocket and subsequently reverse over a short period of time.
Understanding a Meme Stock
Meme stocks are stocks with a compelling narrative that are hyped up and popularized by retail investors on social media platforms. The narratives generally revolve around a turnaround story and/or an undervalued business coupled with a high short interest.
For example, the narrative around GameStop, whose stock is widely regarded as the first meme stock, was that: (1) it was heavily shorted by hedge funds, (2) it was trading significantly below its fundamental value, and (3) recent board changes, with the addition of Ryan Cohen (the former CEO of Chewy), could lead a successful business turnaround.
Given enough support from the online masses on a meme stock and a high short interest, the stock can exhibit extremely high trading volume and bids. As a result, the share price of meme stocks trades significantly above their estimated value implied by fundamental analysis.
Meme stocks are highly volatile, and their prices can skyrocket, and subsequently reverse, over a short period of time. The following shows the share price performance of GameStop in the month of January 2021:
Common characteristics of a meme stock include:
- Being significantly more overpriced than what fundamental analysis would indicate;
- Having significant price spikes and volatility in a short amount of time; and
- Being highly popular with a younger retail investor audience.
How Did Meme Stocks Gain Traction?
Meme stocks originated in 2020 and were primarily fueled by commission-free trading by companies such as Robinhood and the significant growth of online investing communities.
Commission-free trading attracted a significant number of retail investors with a limited understanding of the stock market. Online investing communities, such as those found on Stocktwits and Reddit, grew as the COVID-19 pandemic forced people to stay at home.
Combining the said factors with the fact that individuals with an abundance of cash saved up with nothing to spend it on due to nationwide COVID-19 lockdowns, these individuals started investing their cash into stocks that were highly publicized online, resulting in these stocks being regarded as “meme stocks.”
Examples of Popular Meme Stocks
Popular meme stocks include:
Capitalizing on the Meme Stock Phenomena: AMC Entertainment Holdings
The following illustrates how AMC Entertainment Holdings, a battered theatrical exhibition company, managed to capitalize on the meme stock frenzy:
In January 2021, AMC was nearing bankruptcy and was in desperate need of a capital injection to restructure almost $5 billion in debt accumulated due to the COVID-19 pandemic. Shares of AMC hit an all-time low of $1.91 at this time.
On January 25, 2021, AMC conducted an equity raise of approximately $500 million and $411 million in debt from refinancing its European revolving credit facility. Shares jumped to approximately $5 on this news.
Over a two-day period, from January 25 to January 27, AMC became one of the most-mentioned stocks on Reddit’s WallStreetBets as retail investors rallied together to bet against short sellers of the stock, triggering a short squeeze. Over this period, AMC shares surged over 300%.
Capitalizing on the frenzied jump in its share price, AMC conducted the following raises:
- In May 2021, AMC raised $427.5 million in equity from the sale of 43 million shares at an average price of $9.94 per share;
- In June 2021, AMC raised $230.5 million in equity from the sale of 8.5 million shares to Mudrick Capital Management at an average price of $27.12 per share; and
- In June 2021, AMC raised $587.4 million in equity from the sale of 11.55 million shares at an average price of $50.85.
As a result, in the second quarter of 2021, AMC raised over $1.2 billion from the meme stock frenzy, staving itself off from any near-term liquidity concerns.
Thank you for reading CFI’s guide to Meme Stocks. To keep learning and developing your knowledge of trading and investing, we highly recommend the additional resources below: