The Meme Stock Rally Explained: What You Need to Know

A meme stock rally is a phenomenon where a stock's price surges due to online chatter and speculation, often driven by social media platforms. This can lead to a rapid increase in the stock's value.

Meme stocks are typically small, under-the-radar companies that have a strong online presence. They often have a loyal following of enthusiasts who promote the stock on social media.

These stocks can be volatile and unpredictable, with prices fluctuating wildly in a short period. For example, GameStop's stock price rose from $17.25 to $380 in just a few weeks.

The meme stock rally is often fueled by a combination of factors, including social media hype, short selling, and the rise of online trading platforms.

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A meme stock rally is a phenomenon where online communities promote and build narratives around a particular company's stock, causing its price to rise rapidly. This can happen when a group of people on social media or online forums get excited about a stock and start buying it, driving up the price.

Intriguing read: Meme Stock Price

Meme stocks have generated their own slang and language that's used in online forums and social media, making it easier for people to participate in the hype. For example, a "short squeeze" is a situation where a group of people buy a stock to drive up the price, causing those who had previously sold the stock short to lose money.

The first meme stock is widely regarded as GameStop (GME), whose price rose as much as 100 times over several months in 2020 due to its meme community crafting a short squeeze. This is a stark reminder that meme stocks can be extremely volatile and their prices can be disconnected from the financial viability of the company.

Here are some key characteristics of meme stock rallies:

To participate in a meme stock rally, you need to be an active trader, as the gains can disappear just as quickly as they come in. This means being prepared to make quick decisions and adjust your strategy as the market changes.

GameStop became a stock market sensation during the pandemic, with its stock closing on August 31, 2022, at $28.64 and having a 52-week range of $19.40 - $63.92.

The company lost $400 million from April 2021 to April 2022, and it has just over $1 billion on hand as a runway to figure out how to stop burning through cash.

GameStop shares drifted steadily lower, settling at just over $10 a share by the Spring of 2024, but then experienced a sudden resurgence in mid-May of that year, fueled by the return of Keith Gill, aka "Roaring Kitty", to social media.

This surge caught short sellers off guard, resulting in significant losses estimated at over $1.3 billion in just the two days following Gill's tweets alone.

Other companies, such as AMC Entertainment, also saw their stock prices jump significantly in early trading on Tuesday, May 14, 2024.

Here are some of the top meme stocks that have been in the news lately:

These stocks have been volatile and risky, and retail investors are likely to be the ones to experience the most losses when it all comes crashing down.

GameStop Corp has been a prominent example of a meme stock, with its stock price skyrocketing to $63.92 in 2021. The company lost $400 million from April 2021 to April 2022, and had just over $1 billion on hand to figure out how to stop burning through cash.

The GameStop NFT marketplace, which was introduced to help the company, is generating less than $4,000 in daily revenue. This has led many to question the company's ability to become the "Amazon of gaming" as management had hoped.

GameStop's stock split and NFT marketplace haven't helped the company like management thought it would. The company's stock price has also seen significant fluctuations, with a 52-week range of $19.40 - $63.92.

In 2022, GameStop's stock price remained elevated, although still far lower than its all-time highs. Retail investors continue to be interested in the company's stock, pumping it up to extreme levels in the summer of 2022.

Here's a brief timeline of GameStop's stock price:

AMC Entertainment Holdings was one of the most popular meme stocks in 2021, with its market value shooting up to almost $27 billion in mid-2021. This is a staggering increase from its market cap of roughly $450 million at the end of 2020.

The stock's price fluctuated wildly, closing at $9.12 on August 31 and having a 52-week range of $8.68 to $52.79. This volatility is a hallmark of meme stocks, which often trade at prices that are above their estimated value.

AMC's market cap on September 1, 2022, is $4.40 billion, a significant drop from its peak. The company's financial results for the second quarter of 2022 showed revenue growth to $1.17 billion, but a net loss of $121.6 million.

Take a look at this: Meme Stocks 2021

GameStop and other meme stocks have led to some interesting developments. Companies have taken advantage of the elevated valuations to raise funds through secondary offerings.

In 2021, AMC Theaters CEO Adam Aron raised over $1.5 billion in the first quarter from meme stock buyers. This was done through a series of secondary offerings that capitalized on the persistent demand for shares.

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GameStop followed suit in 2021, raising nearly $1.7 billion via a secondary offering of 8.5 million additional shares. This was sold at an average price of over $200 per share, a staggering amount.

Bed Bath & Beyond announced intentions to sell 12 million shares in a secondary offering in 2022. This was after meme stock promoters pumped up the value of its stock, but the stock fell steeply following the announcement.

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A short squeeze is a phenomenon that occurs when a stock's price rises rapidly, forcing short sellers to cover their positions by buying back the stock at a higher price. This can create a self-reinforcing cycle where the stock's price continues to rise as more and more short sellers are forced to bail out.

Short selling involves selling a stock on margin, which means borrowing shares to sell. As the stock's price rises, short sellers begin to experience losses. If the stock's price continues to rise, short sellers may be forced to cover their positions via margin calls, which can prompt them to buy back the shares at a higher price.

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The losses from short selling can add up quickly, as illustrated by the estimated $1.3 billion in losses suffered by short sellers in just two days following Keith Gill's tweets in May 2024. This rapid price appreciation also caught short sellers off guard, making it even more difficult for them to cover their positions.

Meme stocks are actual stocks listed on exchanges and available for trade, but critics argue that their price performance and appeal have little to do with their fundamentals and much to do with their entertainment value as speculative playthings.

Meme stocks often have a high short-interest ratio, making them hard to borrow, and are frequently discussed by amateur retail traders on social media platforms like Reddit and Twitter.

Retail investors, often young and inexperienced, are drawn to meme stocks due to their popularity and entertainment value, leading to prices that are above their estimated value based on fundamental analysis.

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Roundhill Investments introduced the MEME ETF in December 2021, which tracks 25 meme stocks based on social media popularity and market sentiment.

The MEME ETF features an equal-weighted portfolio, with eligible securities given a social media activity score based on mentions over a 14-day period, and consideration paid to their short interest.

The top 25 firms with the highest social media activity score are included in the portfolio, which is rebalanced twice a month.

Single stock ETFs have also been introduced, providing leveraged long or short positions on a single stock, with some meme stocks like Tesla and NVIDIA included.

Only a small number of these single stock ETFs have been approved for trading so far.

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Creating value is a key aspect of meme stock investing. Companies like AMC are taking advantage of the situation by raising funds from the increased stock value.

The stock price of AMC nearly doubled on Monday, with shares jumping from $3 to $5 per share. This surge in value allowed the company to raise $250 million on Tuesday morning.

The goals of meme stock participants go beyond just making a quick profit. They're also making a statement with their investments.

Some companies are using the run-up in their stock prices to raise funds, which ironically reduces the value of shares held by speculators. This strategy is likely to be adopted by more companies in the future.

Retail investors are supporting these meme stocks, and their efforts are being recognized by some. Gill supports these retail investors, acknowledging their ability to make a statement with their investments.

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