Why is the meme stock mania back?

After the collapse of GameStop in January it seemed like the internet meme-driven stock market frenzy was over. But it’s now back with a vengeance. Can anyone explain why? Ben Chu investigates

The price of the US cinema chain AMC doubled on Wednesday after it offered free popcorn to its small investors (Reuters)

Earlier this year the US video game retailer GameStop became the subject of a spectacular stock market frenzy.

The shares in the ailing firm, which still mostly sells games through a network of bricks-and-mortar stores, exploded in value, from just $80m (£57.7m) in April 2020 to a peak of $24bn in January 2021.

There was no compelling real world business-related reason for the soaring valuation. Rather the stock was being pumped up by a community of non-professional traders, egging each other on online chat forums with amusing memes to push the share price ever higher.

The meme stock phenomenon generated massive media and even political attention as people struggled to work out what was going on and what it all meant.

Then came the collapse. Between 27 January and 18 February GameStop lost almost 90 per cent of its value – and the subject fell out of the headlines.

Many assumed that a manifestly ludicrous bubble had burst and that market reality had, as predicted, reasserted itself.

And yet the meme stock frenzy did not die – it merely took a breather.

GameStop shares have, without attracting many headlines, been climbing fast again in recent weeks and the company is once again valued at around $20bn.

Moreover, another meme stock called AMC – a struggling US cinema chain which came close to bankruptcy last year – has recently made GameStop look rather boring.

The company, valued at $315m in January, hit a market capitalisation north of $31bn earlier this week, with the shares rising a phenomenal 2,000 per cent since the start of the year.

It doubled on Wednesday alone after the executives offered free popcorn to their new army of small investors.

In January there were a host of rationalisations offered for the meme stock phenomenon.

Some argued it was a product of very unusual pandemic circumstances. Lots of Americans had received stimulus cheques from the US government yet, due to lockdowns, had limited opportunities to spending the cash.

The result, so we were told, was effectively an orgy of online share buying, fuelled mainly by bored young men looking for some amusement.

The advent of various cleverly designed share trading apps such as Robinhood also seemed to have “gamified” investment, luring more people into the market.

Another explanation was that it could be characterised as a kind of nihilistic revolt against the power of big financial players like hedge funds, who were “shorting” (effectively betting against) companies like GameStop that had been hit hard by the pandemic for obvious reasons.

Pushing up the value of these stocks was a way for small traders to inflict a “short squeeze” on these big hedge funds, costing the funds billions of dollars to unwind their bets. Causing losses to hedge funds was apparently seen by some as a victory in itself.

And now? The same explanations as in January are generally being offered again by professional market analysts.

“AMC and meme stocks are somewhat the modern and accelerated version of tulip bulbs frenzy in the 17th century,” says Sylvain Goyon of Oddo BHF.

Charles-Henry Monchau at FlowBank says the saturation of markets with cash from central banks and stimulus cheques from the US government is creating “bubbles and extreme situations”.

The view in markets is that the frenzy is back because the underlying forces from the first phase are still in place, although with the possible ironic twist that certain hedge funds are also participating in the share buying in the hope of profiting from the “momentum” in the stocks.

Very few seek to justify the spectacular run up in share prices as a reflection of hitherto unrecognised long-term profit opportunities for the firms, which is supposed to be the basis for stock market valuations.

“There is a little chance that the actual and future business environment would ever justify a $33bn worth of market capitalisation [for AMC] unless there is an incredible innovation in the movie theatre business that no one’s heard of, and which would change the face of the business,” says Ipek Ozkardeskaya of Swissquote.

Indeed, the executives of AMC on Thursday released a statement effectively warning that the company was being grossly overvalued.

Simon French of the London-based stockbroker Panmure Gordon argues that the modern trading apps are simply facilitating a traditional impulse: pure speculation. Traders are buying these stocks for no other reason than they think they will go up in value.

“Ultimately there is nothing new here,” he says. “Buy something you feel you can flog to someone for more money at a later date? It’s as old as the hills.”

Speculative bubbles are certainly not new. Yet they are usually based on an underlying narrative that provides some semblance of economic justification for the participants, whether that’s the profitability of new colonial settlements or the possibilities opened by the arrival of some new technology. The collapse generally happens when the narrative is exposed as false, or at least grossly exaggerated.

What’s unusual about this bubble is that it apparently has no need for such economic narratives – and draws its strength from nothing more than memes and the sense that it would be amusing to send troubled and apparently outmoded companies soaring in price.

Which makes it harder than usual to predict what will bring on the final curtain.