Meme stocks are still a thing, as last week’s incredible rally proved. Shares of GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) both more than doubled in a matter of days as investors and speculators piled into these high-risk stocks.
However, unlike the 2021 rallies which were sustained for a much longer period of time than many thought possible, this rally appears to be fizzling out. At the time of writing, GME stock is down another 8% today. AMC is seeing a little less steep decline, losing less than 3%.
Thus, there are now questions as to whether this meme stock rally is dead or if another leg higher is possible. Last week’s rally was spurred by a meme posted by X (formerly Twitter) account Roaring Kitty, which many took as an indication Keith Gill (the man behind this account) may be pondering a move back into the stock. Short sellers lost more than $1 billion in a single day on this tweet. However, over the past week, the tables have turned with GameStop investors losing more than $13 billion.
Let’s dive into what to make of this insanity right now.
Meme Stocks: The Rally Fizzles
First and foremost, it’s important to address that both GameStop and AMC have terrible fundamentals. The bricks-and-mortar video game retail space, as well as the theater/cinema business, are in secular decline. Video games are much easier to purchase online, and streaming and other in-home entertainment options have disrupted the business model for movie theaters, perhaps forever. The pandemic certainly helped accelerate these trends, and there’s no denying there’s a fundamental bear thesis investors have to be aware of.
Sure, there are many still holding out for some sort of miraculous recovery. And one could argue that the meme stock rally of 2021 really was the only way these two businesses could stay afloat. Both companies issued a massive amount of stock when their stock prices soared, diluting shareholders by a significant margin. Indeed, it should be no surprise that this playbook was tapped yet again on last week’s rally, with at-the-market offerings at AMC making headlines.
Less Cash, Less Gambling
It’s my view that sustained short-squeezes are very rare, and 2021 was an anomaly. We were all stuck at home, retail investors were flush with stimulus checks, and the casinos were closed. One of the only ways to gamble and have a little fun was to engage in a little speculative buying activity in the world’s largest casino (the stock/options market).
Those days are over. Consumers are strapped for cash, and these $13 billion of losses (much of which will be borne by retail traders) will likely make any future short squeezes in such names less likely. Given the market capitalizations of these companies, and the sheer number of shares in existence, it’s my view the meme stock rally has fizzled for now in these two names.
On the date of publication, Chris MacDonald 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.
