Investor appetite for "meme stocks" may already be waning.
The shares of GameStop, AMC Entertainment, BlackBerry and other companies embraced by retail traders plunged on Wednesday morning.
After soaring more than 130% earlier this week, GameStop shares plunged 33% to $32.44 in Wednesday morning trading. AMC, a theater chain, shed 26%; business software maker BlackBerry fell 9%; and Virgin Galactic, Richard Branson's space flight company, tumbled 14%.
The stocks had surged the previous day after Keith Gill, known online by his handle "Roaring Kitty," resurfaced on X (formerly Twitter) after a three-year hiatus. Gill, who has a large following on social media platforms, became the face of meme stock traders in 2021 after he bought shares of GameStop, a video game retailers, for $53,000 and turned it into a multi-million stake amid growing hype around the stock.
But meme stocks carry risks for small investors hoping to make a profit because such shares tend to be volatile, with large swings in either direction, experts have cautioned.
"People are only buying because they believe more people will come in and buy after them, so they can sell at a higher price to those new buyers," noted Cory Mitchell, an analyst with Trading.biz, in an email. "The stock may go higher in the short-term, but unless the company has a massive turnaround whatever rally develops will be followed by swift and severe selling."
What are meme stocks?
Meme stocks are companies whose shares are lifted by social media buzz rather than traditional financial fundamentals such as growth and profits. Meme stocks are typically unprofitable or face challenges in their core businesses, which add to the risks for small investors, experts added.
GameStop has struggled to grow, with the company recording a net loss of $331.1 million on revenue of $5.9 billion for its fiscal year 2023, compared with a loss of $381.3 million on revenue of $6 billion the previous year, according to S&P Capital IQ.
"The company appeared to lose significant market share for hardware and software (in particular) in the fourth quarter, as it underperformed modest industry growth by a wide margin," Wedbush analysts said in a research note.
And AMC on May 8 said it lost $135 million in the first quarter, while revenue was little changed at $951 million as the movie industry was impacted by a slimmer box-office lineup due to last year's actor and writers' strikes.
Meanwhile, AMC is taking advantage of the renewed interest in its shares, saying in a May 14 regulatory filing that it had raised $250 million of new capital by selling almost 73 million shares. It also said it entered into another agreement to swap some of its debt for stock, which could have contributed to its stock gains earlier in the week.
"The air is coming out of the mini meme/nonsense stock surge, thanks in large part to the AMC debt-for-equity swap, which caused its shares outstanding to rise even further," market analyst Adam Crisafulli of Vital Knowledge told investors in a note.
In resurfacing on X, Gill posted an image of a person leaning forward in their chair, which Mitchell said his followers took to mean "pay attention."
"There was no mention of stocks or guidance provided, but traders took it to mean that 2021 was potentially about to repeat," Mitchell added.
In one respect, that appears to be holding true. At the start of 2021, many of the meme stocks soared but then tumbled later that year and into 2022, as reality set in.
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