Meme stocks took over the market in late January, and in recent days they’ve rallied again.
In most cases, and maybe all, the rallies have gone simply too far. We’ve seen some meme stocks gain over 1,000%. Others have reached obviously unsustainable valuations.
But at the same time, there are fundamental underpinnings to the case for many of the hottest “Reddit stocks.” These aren’t shell companies, or straight pump-and-dumps. Investors are buying real businesses with real potential.
Obviously, those investors need to pay the right price for that potential, and that’s the big problem at the moment. But as the dust settles, there may be opportunities. And so it’s worth looking at the long-term outlook for 10 of the most popular meme stocks:
- GameStop (NYSE:GME)
- AMC Entertainment (NYSE:AMC)
- Nokia (NYSE:NOK)
- Express (NYSE:EXPR)
- Koss (NASDAQ:KOSS)
- Bed, Bath & Beyond (NASDAQ:BBBY)
- Sundial Growers (NASDAQ:SNDL)
- Tilray (NASDAQ:TLRY)
- Zomedica (NYSEAMERICAN:ZOM)
- BlackBerry (NYSE:BB)
Meme Stocks for the Long Term: GameStop (GME)
For all the hype over the $483 peak and r/WallStreetBets and the supposed “short squeeze” (which probably was actually a “gamma squeeze”), it’s important to remember what caused GME stock to start moving last year: solid fundamental analysis.
The early GME bulls certainly saw the heavy short interest as a potential catalyst for the stock. But they also argued that the market was mispricing the stock for two core reasons.
First, they believed the market was interpreting GameStop’s plunging profits as a sign of the end of GameStop. In fact, bulls argued, they were a sign of the end of the console cycle. With new consoles coming from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), earnings would quickly rebound in 2021 and beyond.
That bull case was valid. It still is — at the right price. With GME stock soaring again on Wednesday, and giving GameStop a market capitalization over $6 billion, the price isn’t right yet. But once the dust inevitably settles, it may be again.
AMC Entertainment (AMC)
For AMC Entertainment, however, the bull case is tougher to make. That’s true even though AMC, unlike GameStop, managed to use its epic rally to fix up its balance sheet.
AMC did see lender Silver Lake convert $600 million in debt into AMC stock, which will lower debt and interest expense going forward. It raised another $300 million at roughly $5 per share in two days in late January. That was on top of $917 million in cash added between Dec. 14 and Jan. 25.
That’s all well and good, and AMC has created some breathing room. But it’s not as if AMC fixed its balance sheet. The company closed the third quarter with nearly $6 billion in debt. Even adjusting for cash held then, the Silver Lake conversion, and the capital raised since, borrowings remain above $4 billion.
Meanwhile, AMC’s share count has ballooned from under 140 million shares to 356 million shares at the moment.
At $9, then, incredibly AMC has a market capitalization near $3 billion. At the beginning of 2020, before the novel coronavirus pandemic hit, AMC was worth less than $1 billion. In fact, even with the balance sheet moves, AMC now has a higher enterprise value (market capitalization plus net debt) than it did at the beginning of 2020.
It’s hard to see how that makes sense. The pressures on the movie theater business were extant long before the pandemic shuttered theaters. The rise of Netflix (NASDAQ:NFLX) and other streaming services is one factor. Consumer spending on better home systems during the pandemic likely hasn’t helped.
This still looks like a company with a significant risk of going bankrupt. It certainly doesn’t look like a company that merits an enterprise value of some $8 billion.
I’ve been bearish on NOK stock for years now. Even with the stock having round-tripped following a brief late January spike, I’m bearish still.
To be fair, there is a bull case here. Relative to earnings, NOK remains cheap. The opportunity in 5G is real.
Yet there’s been a bull case for years now. Nokia simply has failed to execute. Bear in mind that Nokia was on the winning side of one of the most lopsided deals in history: the $7.2 billion sale of its handset business to Microsoft. Microsoft dumped the business two years later for just $350 million.
That windfall didn’t help NOK stock. The merger with Lucent-Alcatel didn’t help. 5G hasn’t yet done anything, either.
Perhaps this time will be different. But that seems like a questionable bet, even with NOK back at $4. Meanwhile, Reddit missed the far more attractive opportunity: rival Ericsson (NASDAQ:ERIC), which trades at a similar valuation with better performance and market share growth.
The group of meme stocks has some odd choices, and Express is one of them. Investors looking for struggling mall retailers had (and have) plenty of options. EXPR’s short interest wasn’t even particularly high.
All that aside, there was a reason Express stock was trading below $1 at the beginning of the year: the company is in trouble. Even in fiscal 2019 (ending Feb. 1, 2020), Express was unprofitable. Same-store sales were heading in the wrong direction, including a 6% decline in the retail business.
Before the Reddit-driven rally, the Express turnaround seemed like it had little chance of succeeding. Rather, the brand seemed destined to join so many other mall-based retailers that wound up in bankruptcy. Other than EXPR gaining 257% year-to-date, it doesn’t appear that all that much has changed.
KOSS might be the strangest of all the meme stocks. That’s not to say there’s anything wrong with Koss. It’s just difficult to see what sparked any optimism toward the stock, let alone enough to send it up 3,600% in a matter of weeks. This doesn’t even appear to have been a short squeeze: short interest at Jan. 15 was a little over 12,000 shares.
To be fair, Koss is a relatively interesting company. Its core claim to fame is that it invented stereo headphones, back in the late 1950s. And before the January rally — and a curious one-day frenzy in late December — KOSS stock had rallied nicely from March lows.
All that said, this really is just a sleepy nano-cap stock. Koss’s twelve-month revenue is $18.9 million. Net income over that stretch is just $700,000.
And yet KOSS stock now trades at nearly 200x those net earnings. There’s seemingly no justification for that multiple. When and if KOSS returns to being a sleepy nano-cap, there might be an intriguing case. Until then, the stock is an easy one to avoid.
Bed, Bath & Beyond (BBBY)
BBBY is one of the meme stocks that had a real “short squeeze” case. At Jan. 15, short interest was some 74 million shares — about 60% of the outstanding total. Even with covering since, about 28% of shares are sold short at the moment.
BBBY is also a name where both bulls and bears can make reasonable arguments. Bears saw a declining brick-and-mortar retailer with a leveraged balance sheet — an absolutely brutal combination even before the pandemic. Indeed, BBBY entered last year below $20 after touching nearly $80 in early 2015.
But bulls saw the case for a turnaround under new management. Concepts beyond the namesake brand, including buybuyBABY, have real value and the potential for a GameStop-like pivot to digital.
Simply put, BBBY was a battleground stock before it joined the rank of meme stocks. And although the stock is up 54% year-to-date, given the balance sheet leverage, that move doesn’t significantly alter the case. Bulls and bears likely see the name the same way now as they did two months ago.
Sundial Growers (SNDL)
I detailed the long-term case for SNDL stock back in December. Heading into 2020, Sundial appeared at significant risk of bankruptcy. A series of moves strengthened the balance sheet and positioned Sundial Growers for a possible turnaround.
By late January, it was already clear that the company was becoming more aggressive. And then the craziness started.
SNDL stock closed on Jan. 26 at 56 cents after a six-session losing streak. Over the next 11 trading days, it rallied a stunning 427%.
Even with a recent bounce, shares have shed more than half their value from the peak. There’s probably more downside ahead. The story can work long-term, and the opportunity for Canadian cannabis companies like Sundial remains attractive. Yet competition is stiff, growth has disappointed, and Sundial still has an awful lot of work to do.
A market capitalization over $2 billion doesn’t seem to properly account for those challenges. But like so many meme stocks, SNDL could be attractive again — when and if its stock price returns to Earth.
The optimism makes some sense. The Canadian cannabis industry still is trying to shrink its production capacity, debt and, most importantly, costs. The merger should help the combined company accelerate progress on all three fronts. It creates a legitimate rival to Canopy Growth (NASDAQ:CGC) and Cronos (NASDAQ:CRON), both of which are backed by massive war chests.
But at this point, there’s no reason to play that merger via TLRY stock. Aphria shareholders are receiving 0.8381 Tilray shares for each share they own. TLRY closed Wednesday at $27.98, which in turn suggests that a share of Aphria stock should trade at $23.45.
APHA, instead, is barely above $20. So the math is simple and so is it lesson: investors who want to own the combined company after the merger closes should own APHA, not TLRY, before the merger closes.
The problem for ZOM stock isn’t just the massive rally: the stock is up over 3,000% from last year’s lows. The problem is that the story many bulls are telling doesn’t quite match with the reality of the business.
The pitch for ZOM is that the company is set for potentially exponential growth. Its Truforma diagnostic platform is set to launch. Truforma offers diagnostic assays that can test companion animals for thyroid and kidney diseases — with the results available in-office.
Essentially, Truforma is a veterinary version of what disgraced start-up Theranos promised. Only Truforma is, well, real.
But Truforma also serves a dramatically smaller customer base. Zomedica itself has said that the entire diagnostic market for companion animals should be less than $3 billion in 2024. Truforma is targeting only a small slice of that market, yet it is now valued at some $1.8 billion (including the significant number of warrants outstanding).
Truforma is likely to drive some growth. It’s unlikely to drive enough growth.
BlackBerry, the former leader in smartphones, is trying to reinvent itself — again. This time around, BlackBerry is trying to use its expertise in security to build out a cybersecurity platform.
It’s an intriguing case, albeit one that will take faith and patience. BlackBerry exited its hardware business back in September 2016. From that point to the beginning of this year, BB stock had posted negative returns amid a roaring broader market.
So this at the least seems like a “show me” story. Yet BB’s membership in the club of meme stocks seemingly prices in some level of success. Given how long it has been since BlackBerry has been even relevant, let alone successful, the rally seems too early. Patience seems advised, in terms of both the company’s results and the BB stock price.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.