2021 was certainly the year of the meme stock. January of last year played host to one of the most memorable short squeezes in stock market history as a group of Reddit-based retail investors collaborated to create a significant rally on GameStop stocks which saw their price climb some 1,900% from its price at the beginning of the year. Subsequent meme-based surges for stocks like AMC looked to cement that speculation, rather than fundamentals, now has the power to deliver growth. However, with analysts beginning to believe that the meme bubble has finally burst, is it game over for 2021’s biggest phenomenon? 

There’s little doubt that the meme phenomenon made many early investors rich. Stocks like AMC managed to climb to a peak share price that was more than 3,000% higher than its value at the opening of the calendar year. 

(Image: AXIOS)

As the chart above shows, by the end of the first half of the year, we can see that a number of meme stocks had grown exponentially. By June 3rd 2021, AMC stocks were trading 2,660% higher than the beginning of the year while other assets like Express, Blackberry, and Bed, Bath & Beyond had also grown by more than double at least. 

With such impressive numbers, why has the trend failed to continue growing? And why are market analysts predicting that the game is up for meme-based investing? Let’s take a look at the rise and fall of the meme phenomenon: 

What is a Meme Stock?

Firstly, let’s get to the bottom of what actually counts as a meme stock. The best way to summarize a meme stock is to identify them as shares of a company that’s gained a passionate and cult-like following across social networks like Reddit, TikTok, Twitter, and various other major online communities. 

These company fans help to generate hype around a stock online through discussion threads on websites. When GameStop’s short squeeze occurred, the push was largely orchestrated on Reddit’s board, r/WallStreetBets, for example. This can pave the way for huge inflows for stocks that may not have the fundamentals that would generate such interest online. 

Meme stock communities can significantly impact the price of shares through strategic efforts to generate hype across stocks that may have been largely shorted by institutions - generating a short squeeze that can send share prices soaring. This means that meme stocks can become largely overvalued whilst maintaining their respective prices due to their passionate communities holding their respective investments. 

Life Inside a Bubble

In the wake of an enthralling AMC price rally at the beginning of the summer, analysts were quick to state their belief that the meme stock phenomenon follows similar bubble patterns throughout the recent history of investing. 

Michael Burry, who was famously one of the first investors to spot the subprime mortgage crisis that led to the financial crash of 2008, was quick to dismiss the sustainability of the meme investing trend. 

“I don’t know when meme stocks such as this will crash, but we probably do not have to wait too long, as I believe the retail crowd is fully invested in this theme, and Wall Street has jumped on the coattails,” Burry said in July. “We’re running out of new money available to jump on the bandwagon.”

We may already be seeing some evidence of meme stocks declining after popular assets AMC and Clover announcing weaker financial results for Q3 - causing AMC Entertainment Holdings to shed 11% of its value. 

The disappointing results led to a 3.5% decline in a basket of 37 meme stocks that had been tracked by Bloomberg - amounting to its shakiest movement since September. 

We can see in the case of AMC, the stock has been unable to maintain its value following a whirlwind rally at the beginning of June. 

“With the Securities and Exchange Commission weighing up new rules for stock trading apps after the frenzy at GameStop and other "meme stocks" earlier this year, a cooling of the trend, in general, cannot be ruled out,” said Maxim Manturov, head of investment research at Freedom Finance Europe. “The report indicates that the SEC may continue to look into the developments that could force the brokerage company to restrict equity trading.”

Billionaire investor, Stan Druckenmiller, recently claimed that the meme investing bubble is part of a far larger bubble that’s encompassing the entire investing landscape at present. 

“Yeah, crypto, meme stocks, art, wine, equities … This bubble is in everything, every asset on the planet,” Druckenmiller warned when asked about a bond market bubble at the Boston Investment Conference.

Bullish Sentiment Still Lingers

Despite warnings of being in a bubble, it’s worth noting that there are still many analysts that remain bullish on the prospect of meme investing. 

“The ‘meme stock’ phenomenon has as much to do with gambling and ‘sticking it’ to the traditional Wall Street narrative and I don’t think that would be affected by actions of the Fed,” Ian Rosen, a partner at TIFIN Partners told The New York Post in the wake of news that the Federal Reserve may increase interest rates. 

Rosen believes that meme stock investors have different motivations to traditional investors, and their willingness to take on more risk could keep them drawn to meme-based assets for longer. 

2021 saw the rapid growth of meme-based investing. Should retail investors recapture a similar level of sentiment towards memes moving into 2022 we may well see more bewildering price rallies. However, with early signs of momentum cooling around various meme stocks, it may be worth approaching investments with the bubble in mind.