2021 was definitely the year of the meme stock. January of last year hosted one of the most memorable short crises in stock market history, as a group of Reddit retail investors teamed up to create a massive surge in GameStop shares that saw their prices skyrocket by nearly 1,900% of their price in The beginning of the year. Subsequent meme-based rises in stocks like AMC seemed to bolster this speculation, rather than fundamentals, now having the potential to drive growth. However, with analysts beginning to believe that the meme bubble has finally burst, is it game over for the biggest phenomenon of 2021?
There is no doubt that the meme phenomenon made many early investors wealthy. Stocks like AMC have managed to climb to a peak in a stock price that was over 3,000% overvalued at the opening of the calendar year.
As the above chart shows, by the end of the first half of the year, we can see that the number of meme shares has grown exponentially. By June 3, 2021, AMC shares were trading 2660% higher than the start of the year while other assets such as Express, Blackberry, Bed, Bath & Beyond more than doubled at least.
With such impressive numbers, why has the trend failed to continue growing? And why do market analysts expect the game to be ready for meme-based investing? Let’s take a look at the rise and fall of the meme phenomenon:
What is a stock meme?
First, let’s get to the bottom of what is actually a stock meme. The best way to sum up a meme stock is to identify it as a post in a company that has gained a passionate following and cult across social networks like Reddit, TikTok, Twitter and many other major online communities.
These company fans help make a fuss about stocks online through discussion threads on websites. When the short GameStop squeeze happened, payment was largely regulated on the Reddit board, ie r/WallStreetBets. This could pave the way for massive inflows of stocks that may not have the fundamentals that would generate such interest online.
Meme stock communities can significantly affect the stock price through strategic efforts to create hype across stocks that institutions may have shorted significantly – creating short squeezes that can drive up stock prices. This means that meme shares can become greatly overvalued while maintaining their prices due to their enthusiastic communities who keep their own investments.
Life inside a bubble
In the wake of AMC’s captivating price rally at the start of the summer, analysts were quick to express their belief that the meme stock phenomenon follows similar bubble patterns throughout recent investing history.
Michael Perry, best known as one of the first investors to spot the sub-prime mortgage crisis that led to the 2008 financial crash, was quick to dismiss the sustainability of the meme investing trend.
“I don’t know when meme stock will crash like this, but we probably don’t have to wait that long, because I think the retail audience is fully invested in this, and Wall Street has jumped to the tail,” he said in July. “We ran out of new money available to jump on the bandwagon.”
We may already be seeing some evidence of meme shares falling after popular assets AMC and Clover reported weaker third-quarter financial results — causing AMC Entertainment Holdings to lose 11% of its value.
The disappointing results led to a 3.5% drop in a basket of 37 meme stocks tracked by Bloomberg — the most shaky move since September.
We can see in the case of AMC, that the stock was unable to maintain its value after a stormy rally at the beginning of June.
“With the SEC balancing new rules for stock-trading applications after the frenzy at GameStop and other ‘meme stocks’ earlier this year, a general calming down of the trend cannot be ruled out,” said Maxim Manturov, Chairman of the Securities and Exchange Commission. Invest in Freedom Finance Europe. “The report indicates that the SEC may continue to consider developments that may compel the brokerage firm to restrict share trading.”
Billionaire investor Stan Druckenmiller recently claimed that the meme investment bubble is part of a much larger bubble that encompasses the entire investment landscape nowadays.
“Yes, cryptocurrencies, meme stocks, art, wine, stocks… this bubble is in everything, every asset on the planet,” Druckenmiller warned when asked about the bond market bubble at the Boston Investment Conference.
Bullish sentiment still lingers
Despite warnings of being in a bubble, it should be noted that there are still many analysts who remain optimistic about the prospect of investing in the meme.
Ian Rosen, partner at TIFIN Partners, told the New York Post in the wake of news that the Federal Reserve may raise interest rates.
Rosen believes that meme stock investors have different motivations than traditional investors, and that their willingness to take more risk may make them gravitate to meme-based assets for longer.
2021 saw rapid growth in meme-based investing. If retail investors regain a similar level of sentiment toward memes moving into 2022, we could see more baffling price hikes. However, with early signs of declining momentum around many meme stocks, it may be worth approaching investments with the bubble in mind.