What Are Meme Stocks and Are They Real Investments?

What Is a Meme Stock?

A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This is usually due to activity online and particularly on social media platforms. These online communities can dedicate heavy research and resources toward a particular stock.

Meme stocks often have heavier discourse and analysis in discussion threads on websites like Reddit and posts on platforms such as X (formerly Twitter) and Facebook.

How Meme Stocks Work

A meme is an idea or element of popular culture that spreads and multiplies across people’s minds. Memes gained prevalence and relevance as the internet and social media grew. They allow people to rapidly spread humorous, interesting, or sarcastic videos, images, or posts around the world. The rapid and multiplicative effect of sharing such posts can make them go viral.

Chat rooms and discussion boards devoted to investing and promoting stocks arose with the arrival of the internet. These sites helped promote and drive up the prices of so-called dotcom stocks in the late 1990s and early 2000s. It was a bubble that famously burst with far-reaching economic consequences.

Meme stocks didn’t truly emerge until the year 2020 via the Reddit forum r/wallstreetbets, however. WallStreetBets became known for its unconventional and often irreverent tone, unlike its predecessors and other investing message boards. Users work together in this and other forums that have popped up since to identify target stocks and then promote them while also putting their own money to work.

Some believe that meme stock communities coordinate their efforts to influence the prices of these shares but meme stock shareholders are often an unorganized set of independent individuals. Each has their investment views and preferences. Their independent actions have been shown to collectively initiate short squeezes in heavily shorted names. Meme stocks can become overvalued relative to fundamental technical analysis as a result.

GameStop: The First Meme Stock

The YouTube persona Roaring Kitty posted a 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 in August 2020. He explained that the stock had among the highest short interest in the market, largely with short positions held by hedge funds. These funds would have to cover their positions in the event of a massive short squeeze, driving the stock much higher.

The former CEO of Chewy.com and investor Ryan Cohen purchased an unknown amount of GME stock a few days later which Gill acknowledged on Twitter (now X). It became public knowledge Cohen owned a 10% share in the company in November 2020. He joined the board on Jan. 12 and the stock rose rapidly. The value doubled by closing two days later; an 8x increase from the price at the time of Cohen’s and Gill’s previous posts.

The short squeeze that the Roaring Kitty had suggested earlier took place in earnest in January 2021. The price of GME shares exploded to nearly $500 amid a frenzy of short-covering and panic buying.

The main victims of the squeeze were a handful of hedge funds, some of which were forced to shut down due to heavy losses. The meme stock concept adopted a David vs. Goliath or Robin Hood connotation as a result: taking from the rich Wall Street elite and rewarding the small retail investor.

GME is squeezed again

GameStop shares drifted steadily lower after the initial meme stock craze, settling at around $10 a share by the spring of 2024.

The stock then experienced a sudden resurgence in mid-May of that year, however, fueled by the return of Keith Gill, also known as “Roaring Kitty,” to social media. Gill had been largely absent from the public eye since the height of the meme stock frenzy in 2021. He posted a cryptic image from his X account which was viewed over 24 million times, followed by a series of movie-inspired video memes.

These posts didn’t make any recommendations or indications about GME or any other stocks but they reignited frenzied interest in meme stocks, causing a massive surge in trading volume and price. GameStop shares skyrocketed nearly 100% on Tuesday, May 14, 2024 following a 74% increase the previous day. This rapid price appreciation caught short sellers off guard, resulting in significant losses estimated at over $1.3 billion in just the two days following Gill’s tweets.

The renewed meme stock rally also extended to other companies such as AMC Entertainment, which saw its stock price jump 120% in early trading on Tuesday. AMC took advantage of the heightened interest by raising approximately $250 million through a share sale.

Market analysts and observers drew parallels between the 2024 rally and the original meme stock phenomenon of 2021 but opinions were divided on whether this surge would have the same lasting impact or if it was simply a brief revival of the speculative fervor. The sudden resurgence of meme stocks in May 2024 nonetheless served as a reminder of the unpredictable nature of markets and the power of social media to drive investor behavior.

Other Meme Stocks

GameStop was the first successful meme stock but it wasn’t 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. 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 as these became recognized meme stocks.

Some meme stocks didn’t fare as well as others, however, even with the occasional short squeeze. Other meme names have included Bed Bath & Beyond Inc. (BBBY), Koss Corp. (KOSS), Vinco Ventures (BBIG), Support.com, and even the meme stock enabler Robinhood Markets Inc. (HOOD).

A Meme Stock Glossary

Meme stock communities have developed a lingo that’s used in their posts online. Some of these terms include:

• Apes: 🦍 These are members of the meme stock community. Some have attributed this to a meme related to the movie Rise of the Planet of the Apes but others have suggested that the label comes from the banding together of “dumb apes” to take on the Wall Street elite.
• BTFD: This is an acronym for “buy the f***ing dip.” Buying the dips means going long on a stock after its price has declined in the near term. It’s meant to be repeated after each such drawdown.
• Diamond hands: 💎🤲 This has come to mean holding onto a stock despite even heavy losses, confident that the price will eventually increase.
• FOMO: This translates to “Fear of missing out.” You’ll regret it if you don’t catch the meme stock wave.
• Hold the line: This is a battle cry to encourage others to stand firm with diamond hands in the face of volatility.
• Paper hands: 🧻🤲 This is a derogatory slur leveled against those who fail to maintain diamond hands. They’re perceived as weak individuals without conviction who sell their shares too quickly.
• Stonks: This is an ironic misspelling of the word “stocks.” It predates WallStreetBets and often depicts a crudely designed bald man in a suit staring blankly at an arrow pointing upward in price.
• Tendies: 🔥🍗 Tendies is short for chicken tenders. It refers to profits made in meme stocks. There are several claims for why this fast-food item is used for collecting profits.
• To the moon: 🚀🌙 This translates to 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 but companies have also capitalized on the meme stock phenomenon. AMC Theaters CEO Adam Aron took advantage of the elevated valuation and engaged in a series of secondary (follow-on) offerings in 2021 as a result of sky-high prices and persistent demand for shares among individual investors. This raised more than $1.5 billion in the first quarter from voracious meme stock buyers.

GameStop followed suit in 2021, raising nearly $1.6 billion via a secondary offering of 8.5 million additional shares at an average price of about $200 per share.

Bed Bath & Beyond announced intentions to sell 12 million shares in a secondary offering in 2022 as meme stock promoters pumped the value of its stock. The stock fell steeply following the company’s announcement of the plan, however.

Meme Stocks and Short Selling

One of the features of meme stocks, especially early on, has been that they tend to be heavily shorted names. There’s a lot of short interest in the stock or a large proportion of the company’s outstanding shares have been sold short.

Short selling occurs when someone sells shares that they don’t own, hoping to buy them back at a lower price. It’s a bet that prices will go down. The seller must borrow shares from someone who’s long the stock to sell them. There are fewer shares left available to borrow as more and more shares are sold short in this way. Even the most motivated short seller may be unable to do so when a stock becomes hard to borrow.

Short squeeze

Stocks are sold short on margin because they involve borrowed shares. The short seller will begin to experience losses as the price of the shorted stock rises. These losses must be covered promptly and are often spurred by margin calls where the broker demands funds to make up for those paper losses.

A short seller may ultimately run out of available funds to hold onto the short and will be forced to buy back the shares at a higher price and close out the position. It adds additional upward pressure on the stock’s price as they’re all forced to buy the stock and cover at ever higher prices when many shorts are forced to cover at once. 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.

The Bottom Line

Meme stocks became a hot investment theme for day traders and retail investors early in 2021, resulting in short squeezes on hot stocks such as GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC). These stocks are named after the virality of internet memes found on social media and saw online communities form around them to boost and hype their prospects even though meme company fundamentals remained questionable.