Meme Stocks Aren’t New, But Their Biggest Fans Are
(Bloomberg Opinion) -- Get used to meme stocks because they’re not going away.
The meme stock frenzy that has gripped financial markets this year started in January when shares of video game retailer GameStop Corp. skyrocketed to nearly $350 from around $20 in just two weeks. Other once-sleepy stocks have shot up to varying degrees since then, such as movie chain AMC Entertainment Holdings Inc. and home goods retailer Bed Bath & Beyond Inc.
Meme stocks are at once shockingly new and tiresomely old, all of which point to more memes ahead. What’s new is that the power to move markets once reserved for Wall Street is now in the hands of anyone with a dollar and a smartphone. Trading apps offering zero commissions and fractional shares have opened markets to everyone, no matter how humble their savings. Armed with those new tools, ordinary investors are meeting online to pool their money and take on hedge funds that bet against companies like GameStop or lift the fortunes of beleaguered businesses like AMC.
The old bits are everything else: the fanatic devotion to revered stocks and accompanying surge in trading volume, harrowing highs and lows, and absurd valuations. All of that has been around since markets began, and there’s no shortage of it in the U.S. stock market right now. Indeed, this is a market brimming with cultish zeal for disruptors, green companies and pot purveyors, not to mention cryptocurrencies, SPACs, NFTs and other fads beyond the stock market.
In that light, GameStop and AMC, the best known and most widely followed of the meme stocks, are hardly unusual. Consider their valuations, for instance. I’m using a price-to-sales ratio because it provides the broadest basis for comparison with other stocks. More than 200 companies in the Russell 3000 Index, which represents the largest U.S. public companies by market value, have a higher P/S ratio than AMC based on sales during the last year. And roughly 1,500 of them have a higher ratio than GameStop. The two meme stocks aren’t even the most expensive stocks in their respective sectors.
And that’s based on last year’s revenue, an abysmally low number for brick-and-mortar retailers and movie theaters navigating a global pandemic. Based on expected sales over the next 12 months, there are about 600 stocks with a higher P/S ratio than AMC, and roughly 1,000 with a higher ratio than GameStop. In other words, high valuations are a common feature of what is arguably the most expensive stock market in the world today and among the most expensive markets ever.
Meme stocks aren’t necessarily the most heavily traded, either. AMC has had the highest average trading volume over the past six months, but GameStop ranks 19th among Russell 3000 stocks by that measure. And other meme stocks, such as Bed Bath & Beyond, Wendy’s Co., Clean Energy Fuels Corp. and Workhorse Group Inc. are much further down the list. The same goes for meme stocks’ volatility. GameStop and AMC have been among the most volatile this year, as measured by the standard deviation of their daily price changes, but not uniquely so. And here again, other meme stocks are nowhere near the top of that list.
I also doubt meme stocks’ shareholders are any more starry-eyed than those of Tesla Inc. or Zoom Video Communications Inc. or any of the numerous other stocks fetching higher valuations. And certainly no more so than investors swept up in earlier fads. Remember Pets.com, WorldCom Inc., Lycos Inc. and the other stupidly priced companies during the dot-com mania of the late 1990s? Or how about Eastman Kodak Co., Emery Air Freight Corp., Simplicity Pattern and the other extravagantly priced Nifty Fifty stocks in the late 1960s and early 1970s. There are endless examples.
Of course, those eras also produced companies that eventually grew in to their outsize valuations and repaid investors’ faith, such as Nifty Fifty favorites Walt Disney Co. and Coca-Cola Co., and internet era stars Amazon.com Inc. and Google parent Alphabet Inc. But it’s almost impossible to pick the winners in advance, no matter how obvious it might seem in hindsight, and therefore a mistake to rule the meme stocks out of hand. It’s exceedingly difficult to predict a company’s future, even when it operates in beleaguered industries like brick-and-mortar retail or entertainment. Fortunes can turn suddenly, and businesses can evolve in unexpected ways.
In fact, the GameStop crowd may be betting that an infusion of cash in the company can turn things around, a wager that activist investors on Wall Street and private equity firms make routinely. And it might be working. GameStop has snatched a pair of senior executives from Amazon to lead the company. It also reported better-than-expected results last week and increased revenue 25% over the last year through the most recent quarter. “Its promised transformation is taking shape and making significant progress,” my Bloomberg Opinion colleague Tae Kim noted. Investors in other meme stocks may be making a similar bet.
Don’t get me wrong. I’m not recommending GameStop or AMC or any other meme stock, but it’s no sillier a proposition than the hundreds of other stocks in this market with dubious futures and laughably high valuations. There have always been hot stocks and there always will be. The difference now is that everyone has a say in which ones go to the moon. The meme-stock era may be just beginning.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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