Meme Stocks

Meme stocks are company listings that rely heavily on heightened social sentiment and discussions that tend to promote and bring a great deal of attention to a company through online forums.  In this article we discuss Reddit, an emerging meme stock and social media platform that ironically helped give birth to meme stocks.

Back in 2020 the Reddit forum r/wallstreetbets, whose users often adopted a rather flippant tone when compared to other investing discussions, began to identify and promote select stocks.  Large online discussions like r/wallstreetbets tend to build their own, potentially myopic narrative and hype around companies like GameStop (the first recognized meme stock).  This online love tends to create a religious-like fervor for the companies identified. Purchasing based on this social media buzz without considering fundamentals and historical data is one of the first hallmarks of a meme stock.

Another facet of the meme stock phenomena is short interests made by investors who expect the stock price to fall rather than rise.  According to Steve Sosnick of Yahoo Finance, “Meme stocks utilize an intense passion from retail investors who are willing to take on more risk and ignore some of the more conventional investing strategies for a chance at higher returns.”   But these are not necessarily stocks many expect to do well and thrive in the long term.

Is Reddit Fundamentally Sound?

Reddit itself has not seen an annual profit since it launched in 2005, and yet stock prices rose over 90% in the first 3 days of listing.  This was likely driven by a loyal online following, as well as those who hoped to short the stock.  Reddit also enticed investors by citing a deal struck with Google said to be worth about $60 million a year, and with plans to use forum content as a training ground for AI (artificial intelligence).

But since those first 3 days prices dropped almost 25%, closing out last week at around $49, about 18% below the first day’s close of $59.80.  It is also under a new investigation by the Federal Trade Commission, looking into Reddit’s sales, licensing, and proposed sharing of user-generated content to train AI models.  AI is a ground-breaking space with little policy or precedent.  Whether Reddit’s plan to share user content turns out to be lucrative or a bust remains to be seen, and is a gamble assumed by initial investors.

Applying Value Investing

Value investors are not gamblers.  According to Brian Jacobsen of Annex Wealth Management, many jumping on the volatile Reddit bandwagon are “…trying to find the next hot thing” and turn a quick profit.  But this is not a tenet of the value investing strategy.  While those who got in early may indeed see profits from Reddit’s IPO listing, two core pieces of value investing are to minimize risk and to think long-term.  At this time Reddit represents neither.

There are meme stocks like Tesla that have gone on to generate profits for investors, but chasing the next big trend and hoping to find another Apple or Amazon IPO sensation is risky.  It is a desire rooted more deeply in hope and possibility than in fundamentals, actual potential, and strategy.  As value investors, we encourage you to remove the emotions associated with loyalty and community hype, and to protect yourself from cognitive biases like the bandwagon effect.  Instead, we encourage you to look at company details, historical information, management performance, as well as future prospects to make a logical and rather dispassionate assessment of stock choices.

Where do you stand on the Reddit IPO?