Meme stocks like AMC (AMC) and GameStop (GME) get their price spikes from strong buying interest. But those sudden and sporadic gains are as unpredictable as they are risky.
AMC soared on Thursday but erased all of those gains Friday as it fell nearly 10%. Shares soared after influential meme investor Keith Gill, also known as “Roaring Kitty,” posted an image of a mocked-up Time magazine cover with a blank computer screen and keyboard on Twitter/X.
But on Friday, shares fell after the movie theater company announced an agreement to sell 50 million shares, according to a filing with the Securities and Exchange Commission.
GameStop rallied on Thursday as well and added to its gains on Friday. On Tuesday, GameStop will report its third quarter results.
GameStop and AMC are known for volatile movements associated with meme stocks. But are meme stocks a buy now?
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What Are Meme Stocks And Should Investors Buy Them?
Buying Meme Stocks Without Vetting Is Risky
Buying stocks just because they are rallying is a poor strategy. It is better to bring a time-tested method for stock picking and search for buy points in proper bases. Reading their charts can show the risks involved.
Shares of AMC have been trading along the 50-day moving average for weeks now, with the stock basically going sideways.
Third-quarter results announced Nov. 6 lifted shares but the stock quickly gave back the gains. Sales of $1.3 billion declined from $1.4 billion in the year-ago period, while a loss of 4 cents per share showed an improvement from a loss of 9 cents a share a year ago.
In July, the company refinanced and extended $1.6 billion in debt maturing in 2026 to 2029 and beyond. FactSet estimates suggested that AMC held a total of $4.5 billion in debt.
On Dec. 19, 2023, AMC announced that it was issuing 3.3 million shares to an undisclosed buyer in exchange for $25 million in subordinated notes, a form of debt, that will come due in 2026. The private offering valued the stock at 7.47 per share.
The stock got a boost in September 2023 after the company completed a move to sell 40 million shares at an average price of $8.14, raising $325 million.
The meme stock has IBD Ratings that are well below ideal levels. The Composite Rating is just 33.
Panning out for a longer view, IBD MarketSurge’s monthly chart highlights the wild swings that are typical of meme stocks. From a split-adjusted closing price of 11.49 on Dec. 31, 2020, AMC shares hit an all-time high 393.65 on June 2, 2021. That’s a gain of 3,326%. But the stock has crashed since then.
GameStop Q2 Earnings Surprise
GameStop’s fiscal second-quarter sales of $798 million were 31% lower than the prior year’s $1.16 billion. Further, sales declined from the first quarter’s $881.8 million. But earnings of 1 cent per share reversed a year-ago loss of 3 cents per share. Analysts expected a loss of 8 cents per share on sales of $895.7 million.
Shares plunged 12% after the Sept. 10 earnings announcement, sending the stock below the 50-day moving average.
Analysts polled by FactSet estimate October-quarter sales of $887.7 million, which would be an 18% decline from the prior year. They also expect a loss of 3 cents per share.
GameStop’s volatility is cause for caution. For one thing, volatile movement provides little opportunity for well-formed bases.
Further, the stock is down more than 75% from its all-time high 120.75, reached in January 2021.
Going back further, the video game retailer grew an investor fan base in late 2020 at the height of the meme-stock frenzy. By January 2021, the meme stock shot up 1,625% to 81.25, then crashed to 9.63 the very next month.
Investor’s Business Daily recommends stock picks based on strong fundamental performance and chart action while also paying attention to the market and managing risk.
GameStop has an IBD Composite Rating of 50, reflecting weak chart action and fundamentals.
Meme Stocks Rally In May
Dramatic movements are common in meme stocks like GameStop.
Meme stocks rallied in May after Gill posted on X for the first time since the pandemic. AMC (AMC) soared as much as 308% May 13-14 and GameStop (GME) gained 271% to the peak of the same two-day period. But today those gains have vanished almost entirely.
AMC quickly gave up its gains after the movie theater company on May 15 announced an equity swap to exchange 23.3 million newly issued shares for bonds worth $163.9 million maturing in 2026.
Top Financial Soars, Comes Back Down
Top Financial (TOP) was a perfect example of meme stock volatility. The stock skyrocketed in one day from 48.60 to 256.44 on April 28, 2023 — a 428% gain. It quickly crashed and traded for under 10 by May 2023.
Top stock came public on the Nasdaq in June 2022. The initial offering priced at $5 per share for 5 million shares. Shares popped on the first day of trading, reaching a high of 27.50.
The stock rallied more than 50% in early May last year in meme-like action, then reversed gears and fell more than 70% in a single day. Shares have trended even lower since.
The stock is trading around 1.60 a share now. It surged 65% on Feb. 9 and was back to its usual trading range the next day. There was no news on the company.
The Hong Kong-based fintech generates revenue through commissions on trades of equities, futures and options. Its Composite Rating stands at 12.
Is A Meme Stock A Buy Now?
A meme stock is a speculative play, known for high levels of unpredictability because it can rally or crash in any market, and at any time. Its meteoric rises and heart-stopping crashes typically depend on social media hype and online interest.
Hyper stock valuations for these companies depend, for the most part, on young fans and an anonymous following that can appear or disappear overnight. Retail investors dominate the interest in these stocks.
These stocks do not follow traditional investment wisdom, which says you should buy stocks based on earnings growth and performance. As such, they are extremely speculative.
Please follow VRamakrishnan on Twitter for more stock news and analysis.
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