Meme Stock Mania: GameStop skyrockets 60%, AMC surges 32% – But can the craze be sustained?

GameStop, the original meme stock, experienced a dramatic surge this week. Its stock price soared by 60.1% on Tuesday. Other pandemic-era meme stocks also saw significant jumps, with AMC Entertainment’s stock increasing by 32% on Tuesday.

According to Investopedia, “A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually due to activity online, particularly on social media platforms. These online communities can dedicate heavy research and resources toward a particular stock. Meme stocks often have heavier discourse and analysis in discussion threads on websites like Reddit and posts to followers on platforms like X (formerly Twitter) and Facebook.”

The facts

From a financial standpoint, GameStop’s unexpected price increase seems perplexing. Financial analysts contend that the company’s fundamentals—profits, cash flow, and interest rates—have not changed sufficiently to justify such an increase. GameStop just declared a tiny profit following five years of deficits and severe cost and employment cuts, but it was insufficient to fuel the latest spike.

GameStop’s recent stock price increase appears to be driven by investor momentum rather than financial performance. The company’s recent high demand may have been sparked by Roaring Kitty, who uploaded a viral meme suggesting GameStop’s purchase, leading to increased buying activity and eventual profits for traders.

The report by wfaa.com says the fast response to Roaring Kitty’s article demonstrates the simplicity of modern stock trading, with zero-commission apps democratising access. However, high volatility resulted in nine stock halts on Monday and 18 on Tuesday.

The current surge in meme stocks is smaller than in 2021, with investors investing $15.8 million in GameStop and $37.5 million in AMC. Analysts predict institutional investors are better prepared, while smaller investors may exit before larger ones. GameStop’s larger market shares reduce the risk of short squeezes.

The arguments

Should these stocks be rising so fast?

Many financial professionals believe that the recent gains in GameStop and other meme stocks are unjustified by their financial performance. GameStop’s small earnings improvement does not justify a 60% increase in stock price.

Traditional indicators such as earnings and cash flow have not improved sufficiently to explain current market behaviour. As a result, the spike is widely regarded as speculative, fueled by social media enthusiasm rather than real financials.

Influence of social media and retail investors

The importance of social media and powerful individuals such as Roaring Kitty cannot be overstated. The quickness with which a single post can result in significant stock purchases demonstrates the strength of digital platforms in modern trading. While this democratises investment, it raises worries about market stability and the possibility of manipulation. The ease of access to trading apps encourages rash, sometimes foolish decisions, which can result in severe volatility.

Risks of market volatility

Recent trading patterns highlight the hazards involved. Stocks like GameStop can skyrocket in price but also crash suddenly. For example, GameStop’s stock peaked at more than $64 on Tuesday before falling back to $48.75. This volatility offers major dangers to retail investors, who may be persuaded by momentum without fully comprehending the underlying concerns.

Sustainability of the surge

Analysts are sceptical that the current rally in meme stocks will last. The variables that enabled the huge rises in 2021, such as a smaller number of shares and a greater risk of short squeezes, have changed. With more shares in circulation, raising prices will be more difficult. The inclusion of institutional investors, who are more likely to quit trades before individual investors, increases the complexity and danger for smaller traders.

while the current boom of meme stocks such as GameStop and AMC is an intriguing phenomenon fueled by social media and retail investors, it is laden with dangers and does not follow standard financial indicators. The rapid response to social media posts and the accessibility of trading have created a highly volatile atmosphere that can result in substantial losses for unprepared investors.