The Gamestop (LSE:GME) stock price rocketed 27% higher yesterday in what was otherwise a quiet day in the US markets: the S&P 500 was up 0.15%, the NASDAQ up 0.52% and the DOW up 0.09%. Gamestop itself did not release any news to explain the $3.26bn rise in its market capitalisation.
Another stock had a similarly inexplicable rise yesterday. That stock was AMC Entertainment, which moved higher by 20.34%, again without any obvious catalyst. There is a link between Gamestop and AMC — they are both meme stocks.
What are meme stocks?
According to Wikipedia, a meme is an idea, behaviour, or style spread from person to person via the Internet. Social media platforms like Twitter and Reddit are often used to spread a meme. Meme stocks are particularly associated with heavy discussion on the ‘WallStreetBets’ section of Reddit.
Gamestop was once heavily shorted. The hedge funds and the like doing the shorting stood to profit if the Gamestop stock price fell. Using social media like the WallStreetBets sub-reddit, some retail investors coordinated their actions. By buying together they increased the price of Gamestop stock and forced the hedge funds to realise heavy losses.
Other stocks with significant short interest, like AMC, became meme stocks and experienced wild price moves. But over time, the rationale for buying meme stocks espoused on social media has changed. It is not just about teaching the hedge funds a lesson any longer.
Is Gamestop stock a good investment?
Reddit participants, and other investors, have argued that Gamestop stock actually had a compelling investment case, even at eye-watering prices. The argument is that the traditional bricks and mortar retailer has a digital strategy that will deliver. Also, concept stores, themed around retro games, for example, and offering e-sports hubs and tabletop games evenings will make the most of the company’s existing retail footprint.
Gamestop narrowed its losses from $(6.59) per share in 2019 to £(3.31) in 2021, suggesting it is making a turnaround. Analysts forecast that Gamestop will have positive earnings per share of $0.07 in 2023, reversing a long history of losses. However, with the price where it is now, Gamestop stock is trading at over 2,000 times its forecasted 2023 earnings per share. That is an extraordinarily high multiple. Gamestop would have to deliver revenue and earnings growth far above consensus expectations to make that multiple even approach a reasonable level.
What’s next for the Gamestop stock price?
The Gamestop stock price rocketed yesterday with no identifiable change in its investment case. I cannot find evidence that the short interest in Gamestop increased yesterday, possibly explaining its stock price rise as retail investors took on the hedge funds again.
It would seem Gamestop’s price rise yesterday was down to buzz about the stock being generated on Reddit and other social media channels on an otherwise quiet day in the markets. And that’s the trouble with meme stocks like Gamestop. They can rocket 30% in a day and fall by that much just as quickly, often leaving investors puzzled as to why.
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James J. McCombie does not own any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.