What Is a Meme Stock? A meme stock refers to shares of a company that have gained viral popularity due to heightened social sentiment. This sentiment is usually due to online activity, especially on social media platforms. Online communities can dedicate heavy research and resources to a particular stock. Meme stocks often have heavier discourse and analysis in discussion threads on sites like Reddit and posts to followers on platforms like X (formerly Twitter) and Facebook.
Though some believe meme stock communities coordinate efforts to influence share prices, meme stock shareholders are often an unorganized set of independent individuals with their own investment views and preferences. Their independent actions can initiate short squeezes in heavily shorted names. As a result, meme stocks can become overvalued relative to fundamental technical analysis.
GameStop: The First Meme Stock. In August 2020, YouTube persona Roaring Kitty posted a video laying out why GameStop Corp. (GME) shares could soar from $5 to $50. He explained high short interest and potential short squeeze. A few days later, Ryan Cohen, former Chewy.com CEO and investor, purchased an unknown amount of GME stock, acknowledged by Gill on Twitter (now X). In November 2020, it became public that Cohen owned 10% of the company. On Jan. 12, he joined the board and the stock rose rapidly, doubling in value two days later.
In January 2021, the short squeeze took place, with GME shares exploding to nearly $500. Hedge funds were victims, and the meme stock concept took on a David vs. Goliath connotation. GME Is Squeezed Again. After the initial craze, GameStop shares fell to just over $10 by Spring 2024. In mid-May, a sudden resurgence was fueled by the return of Keith Gill to social media. He posted a cryptic image and video memes. While not making stock recommendations, these posts reignited interest. GameStop shares skyrocketed nearly 100% on Tuesday, May 14, 2024, after a 74% increase the previous day. AMC Entertainment also saw a jump. Analysts are divided on the lasting impact.In May 2024, the sudden resurgence of meme stocks highlighted the unpredictable nature of markets and the influence of social media on investor behavior. During COVID-19 lockdowns, bored individuals and zero-commission brokerage apps like Robinhood contributed significantly to meme stock activity. The Robinhood app experienced overwhelming trading volume in meme stocks, leading to trade delays, outages, and platform crashes. This resulted in user outrage, class action lawsuits, regulatory fines, and approximately $70 million in restitution.
While GameStop was the first successful meme stock, it was not alone. WallStreetBets users identified other downtrodden stocks with heavy short interest to boost, such as AMC Entertainment Holdings Inc. (AMC) and Blackberry Limited (BB). Both stocks saw their shares rapidly increase by multiples. As these became recognized meme stocks, members of r/wallstreetbets and similar outlets began to acknowledge the humor of seeing 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 included Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even Robinhood Markets Inc. (HOOD).
Meme stock communities have developed a specific lingo used in their posts online. Some of these terms include: ‘Apes’ for members of the meme stock community, ‘BTFD’ as an acronym for ‘buy the f***ing dip’, ‘Diamond hands’ for holding onto a stock despite losses, ‘FOMO’ for ‘Fear of missing out’, ‘Hold the line’ to encourage others to stand firm with diamond hands, ‘Paper hands’ for those who fail to maintain diamond hands, ‘Stonks’ as an ironic misspelling of ‘stocks’, and ‘Tendies’ for profits made in meme stocks.
There are several claims for why this fast-food item is used for collecting profits.
‘To the moon’: The idea that a stock will rise extraordinarily high, as if to the moon. YOLO: ‘You only live once,’ so why not buy into a meme stock? Other Developments Meme stocks have been a boon to investors, day traders, and brokerage platforms. Companies have also capitalized 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. This raised more than $1.5 billion in the first quarter (Q1) 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 of the plan. Meme Stocks and Short Selling One of the features of meme stocks, especially early on, is that they tend to be heavily shorted names. This means 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 are often hard to borrow, with a high short-interest ratio. Short Squeeze 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. Why Are They Called Meme Stocks? A meme is an idea that spreads rapidly among people. Memes began to take the form of humorous social media posts and viral videos with the advent of the internet. Meme stocks are so-named because ideas about them spread rapidly on social media and web forums.Meme stocks have become a phenomenon in the stock market, with communities forming around them that promote hype and create specific terms and symbols. These stocks gain popularity through social media, where they are mentioned frequently, leading to increased trading activity.
Roundhill Investments launched a meme stock-focused ETF in December 2021, trading under the ticker ‘MEME’. This ETF consists of an equal-weighted portfolio of 25 stocks selected based on their social media popularity and market sentiment. Securities are scored on their social media activity over a 14-day period, considering their short interest, and the top 25 are included in the portfolio, which is rebalanced bi-monthly. Single stock ETFs have also been introduced, offering leveraged long or short positions on individual stocks. Although only a few have been approved for trading, they include some meme stocks like Tesla and NVIDIA. Meme stocks are real, listed on exchanges and available for trade. However, critics argue that their price performance is more about speculative entertainment than their underlying fundamentals. Many meme stocks that experienced high prices in 2021 have seen significant declines in 2022, trading below their pre-meme levels. Notable exceptions like GameStop remain elevated but are far from their all-time highs. The meme stock phenomenon persists, with communities influencing stocks like Bed Bath & Beyond to extreme levels before a crash. Retail investors, particularly younger ones, continue to be interested in meme stocks as a way to generate quick returns amidst rising costs. However, meme stocks are volatile and risky, with retail investors likely to suffer the most in a market downturn. The bottom line is that meme stocks, named for their association with viral internet memes, became a popular investment theme in 2021, leading to short squeezes on stocks like GameStop and AMC Entertainment. Despite questionable fundamentals, these stocks continue to attract attention and speculation in online communities.
