Meme stocks are typically low-priced stocks with a high social media interest. Another factor that’s common among meme stocks is the fact that the short interest in these stocks is significantly high. As bullish interest builds in these stocks, there is a high probability of a massive short-squeeze rally. There were enough examples of big meme stock rallies in early 2021.
However, it would be a mistake to assume that all meme stocks will skyrocket. While the speculative factor is high, there must be some fundamental catalyst to trigger a big rally. I would be extremely cautious with meme stocks as the markets are still far from being in a stage of euphoria. This column discusses three meme stocks to sell as they are likely to trend lower than skyrocket.
I believe that these stocks represent companies with weak fundamentals and quarterly results have been depressing. A sharp correction seems likely and, in my view, it’s better to remain on the sidelines than burn your fingers.
Let’s discuss the reasons to be bearish.
GameStop (GME)
GameStop (NYSE:GME) stock was the poster boy of the meme stock rally in 2021. However, the downside has been sustained and GME stock currently trades at $16.46. The short interest in the stock remains high at 20% and I remain bearish.
In a recent development, Ryan Cohen was named as the CEO of GameStop. Wedbush however believes that the management change is unlikely to take GameStop out of the woods. According to analysts, the key concern is “slow bleed of cash with no clear alternatives to reverse the continuing decline in physical game sales and store traffic.”
It’s worth noting that the company reported cash and equivalents of $1.2 billion for Q2 2023. However, the key factor is curbing operating level losses. Further, sales decline adds to the concern. It remains to be seen if the new CEO can plan a turnaround. The visibility for a positive change however seems bleak.
BlackBerry (BB)
BlackBerry (NYSE:BB) stock has remained sideways for the last 12 months. In general, after an extended period of consolidation, there is a breakout on the upside. However, if there is any bad news, the correction can be sharp. I would assign a higher probability of BB stock trending lower from current levels.
It’s worth noting that the company recently reported results for Q2 2024 and there are multiple concerns. First, revenue declined on a year-on-year basis with operating level losses remaining at the same level. The company’s adjusted EBITDA margin worsened by 700 basis points at a negative of 17%.
Further, BlackBerry witnessed a sharp decline in cybersecurity revenue, which is the key growth driver. However, revenue from the IoT segment was stable. I must add that BlackBerry expects a better second half. I would however prefer to stay on the sidelines and wait for some consistent growth than remain invested. For now, I would not be surprised if BB stock corrects by 15% to 20%.
Peloton Interactive (PTON)
Peloton Interactive (NASDAQ:PTON) stock has been in a downtrend in the last 12 months. The meme stock however remains unattractive at current levels of $5.05. I would expect a deep correction from current levels considering the business fundamentals.
It’s worth noting that the company’s interactive fitness platform was in the limelight during the pandemic. However, in a post-pandemic era, the company seems to be struggling.
To put things into perspective, Peloton reported revenue of $641.1 million for Q4 2023. On a year-on-year basis, revenue declined by 5%. The number of members also declined by 5% during the comparable period.
Further, Peloton continues to report EBITDA level losses and the free cash flow for Q4 2023 was negative at $74 million. Peloton has guided for EBITDA losses for Q1 2024. I am also skeptical about renewed growth in the number of members. With time, an increasing number of people would prefer to go to the gym than opt for an online interactive fitness program. The outlook for PTON therefore remains bearish.
On the date of publication, Faisal Humayun did not hold (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.
