Companies like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) are the face of meme stocks. The attention lavished on their shares at the start of the buying frenzy sent their shares soaring. But after their initial run-up, they became meme stocks to avoid as their stocks plummeted. They have yet to regain any sort of momentum since then.
Many other businesses were also sucked into the vortex. Some were otherwise solid companies like Tesla (NASDAQ:TSLA) while many more were less so, like the recently bankrupt Bed Bath & Beyond.
What exactly a “meme stock” is remains open for debate. One common denominator is generating outsized chatter on social media sites like Reddit. The talk surrounding them quickly causes their stock price to skyrocket.
Many meme stocks are very risky ventures. Others have viable operations but may have hit a rough patch and generated negative sentiment as a result. The following three companies probably fall more into the latter camp as they have big investors exiting their meme stock positions.
Airbnb (ABNB)
The stock chart of Airbnb (NASDAQ:ABNB) might be the first clue its shares are poised for a fall. Shares of the short-term vacation rental company are up 61% in 2023. They are up almost 20% in the past month. While first-quarter revenue and nights and experiences booked both rose 19%, the second quarter is expected to be more difficult. Business is expected to slow with revenue rising 14% and nights and experiences rising less than that.
Data from industry site AllTheRooms indicates cities like Austin and Phoenix are causing Airbnb to suffer a 50% drop in revenue. Available listings are down 48% in Austin and 29% in San Francisco in May. Reventure Consulting CEO Nick Gerli recently warned of a “wave of forced selling from Airbnb owners later this year” in the areas most hurt by the downturn. This makes it one of those meme stocks to avoid.
Both Airbnb and data from industry site AirDNA dispute a coming collapse. The latter says its data shows only a 3% revenue decline while the rental platform argues the doom-and-gloom scenario “is not consistent with our own data.”
Billionaire investor Ron Baron, the founder of Baron Capital, is apparently not taking any chances. He closed out his position in Airbnb by the end of the first quarter at an average price of around $114 per share. That means Baron has lost out on some 10% gains since then, but may have protected against a coming wipeout in the months ahead.
Spotify (SPOT)
Audio streaming platform Spotify (NYSE:SPOT) is another stock that is off and running this year, having more than doubled in value. It’s up 140% since hitting its low for the year last November.
It is the largest audio streaming service in the world with 515 million monthly active users and 210 million premium subscribers. Revenue last year grew 21% to 11.7 billion euros ($12.4 billion). Spotify has a roadmap to reach one billion users by 2030 while generating $100 billion in annual revenue. Yet the streaming audio platform is still generating losses. It ended 2022 with a 430 million euro loss. It’s causing the company to rein in spending.
CEO Daniel Elk told investors earlier this year, “In hindsight, I probably got a little carried away and overinvested relative to the uncertainty we saw shaping up in the market. So we are shifting to tightening our spending and becoming more efficient.” That included firing 6% of Spotify’s employees.
Now rival TikTok is entering the streaming audio business. It launched a streaming music service in Brazil and Indonesia called TikTok Music just this month. While it’s not available in the U.S., that is obviously a threat to Spotify. All in all, it’s one of those meme stocks to avoid.
It could be part of why Jefferies Group (NYSE:JEF) closed out its position in Spotify in the first quarter. Previously it had downgraded the stock from buy to hold and put a $95 per share price target on the stock. That means the investment banking firm missed a 75% gain since then. Having gained so much, though, it’s no wonder big investors are exiting this meme stock.
Tilray Brands (TLRY)
Another stock Jefferies sold out of is marijuana stock Tilray Brands (NASDAQ:TLRY). It looks like it got that one right. Since the end of March, Tilray shares have lost another 32% of their value. It recently closed at just $1.72 per share.
Marijuana stocks in general have had a rough go of it. Legalization in Canada and many U.S. states didn’t live up to the hype as high regulatory hurdles were put in place. In many places, illegal marijuana is cheaper than legal pot because of the red tape companies are required to navigate. The hoped-for national legalization in the U.S. hasn’t panned out either.
Tilray is still a leading marijuana company in Canada with a number of top brands. It also just acquired industry peer HEXO for $56 million. HEXO was another pot stock that fell on hard times, losing 98% of its market valuation by the time Tilray picked it up for pocket change.
Tilray revenue only rose 2% in its fiscal third quarter at the end of February while net losses grew. There’s little prospect for a turnaround for the foreseeable future. Anyone buying in here needs a long, long investment horizon for this one to pay off. Instead, wait for the turnaround in the cannabis industry to start — if it ever comes — before investing. Finding a more viable business for your money now is the smarter strategy.
On the date of publication, Rich Duprey did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
