GameStop and other meme stocks are roaring once again, surging to dizzying heights suddenly and sharply. Some things are different this time around versus the initial supernova for meme stocks, that shocked Wall Street in 2021. The biggest change is that it all feels a bit familiar now. Experts say that experience, plus some changes in the market, should allow Wall Street to digest more easily the sharp movements. But some things remain firmly the same. Chief among them is the risk of losing everything that accompanies the potential to make fast money playing such volatile stocks.
A post on Reddit late Sunday indicated that Keith Gill, a central character in the original 2021 meme stock crack, had built a sizable stake in GameStop. Shares of GameStop closed up 21% to $28 after jumping above $40 right after the opening of trading. AMC Entertainment, another popular meme stock, rose 11.1%.
If it all sounds familiar, it should. It was just three weeks ago that GameStop shares were soaring on excitement about a post on social media by another account tied to Mr. Gill. At that time, a Twitter account associated with him made its first posting since June 2021, though the gains fizzled relatively quickly.
Ever since bands of smaller-pocketed and novice investors began taking stock prices of downtrodden companies to breathtaking heights three years ago, the potential for more flareups has been obvious.
This time, Wall Street is better prepared to more easily digest the sharp movements, experts say. But some things remain firmly the same. Chief among them is the risk associated with such volatile stocks, where prices can soar – and crater – quickly. Here’s a look at what’s going on.
What triggered the latest moves?
Mr. Gill has become a hero online, known for continually professing how much he liked GameStop’s stock, as it charged to heights in 2021, that professional investors saw as irrational. He even said it in testimony before Congress when it was looking into the meme-stock craze.
Late Sunday, an account on Reddit with the handle “Deep [offensive word] Value” shared a screenshot showing an account holding 5 million shares of GameStop stock, plus options to buy more. The total holdings were worth $181.4 million, as of Friday’s close, and the screenshot looked just like ones that the account had shared during the supernova run for GameStop in early 2021.
It was the first post for the Reddit account since April 2021, when it had posted what it called a “final update” on its “YOLO”, or you-only-live-once, investment in GameStop. Euphoria erupted quickly, with users on Reddit exclaiming “I’M HERE FOR HISTORY!” and “If he’s still in, I’m still in.”
When the stock market opened for trading on Monday, GameStop immediately soared.
Should the stock be raising that high?
Financial analysts and professional investors who care mostly about numbers like profits, cash flow, and interest rates would say no. GameStop’s financial prospects did not change over the weekend, before the dizzying swings in its stock price.
Conventional wisdom says a stock should eventually settle at a price that reflects how much cash the company is generating, where interest rates are heading and other factors. But in the short term, what sets a stock’s price is how much investors are willing to pay for it. And, at the beginning of the week at least, people are willing to pay much higher prices for shares of GameStop.
How can the reaction have been so quick?
This is the new age of investing, one where anyone can buy a stock with zero commissions simply by tapping a few times on a phone. It’s the culmination of years of innovation. At each step of the way, consumer advocates hailed the broadening playing field, which allowed more people to invest in stocks and build wealth. But they also warned that easy access could encourage people to trade too quickly or too rashly.
How is this time different from 2021?
Meme-stock companies have more shares trading in the market than they did in 2021, which could lessen the chances of what’s called a “short squeeze,” according to Nick Battista, director of market intelligence at tastylive, a streaming network geared toward options traders.
A short squeeze is a relatively rare event that can yield eye-popping profits for people riding the wave. When investors bet a stock’s price will go down in the future, they “short” it by borrowing shares and selling them. Later, if the price does indeed fall, the short sellers can buy the stock, return the borrowed shares, and pocket the difference.
But when a highly shorted stock rises in price quickly, short sellers sometimes scramble to get out of their trades. They can do that only by buying shares of the stock, which can set off a self-feeding cycle that makes the price shoot even higher.
Such a short squeeze likely contributed to GameStop’s thrilling ascent in 2021, but the SEC’s staff said it was a small fraction of the overall purchases and that GameStop’s stock stayed high even after short sellers had gotten out of their trades.
GameStop in March had roughly 305.9 million shares of its stock trading in the market, more than four times the number of shares it had in March 2021. Such growth “greatly increases the amount of activity needed to squeeze higher” for GameStop and other meme stocks, Mr. Battista said. “Can they move higher? Sure, but it’s going to be a tougher task this time around.”
What are the risks of joining in?
It’s important to know the momentum can shift just as suddenly the other way. It took just four weeks in 2021 for GameStop’s stock to go from less than $5 to more than $120. But it has yet to touch that price again. Even after its big jump in recent days, GameStop shares can still be bought for less than $30.
After briefly reaching $390 during the summer of 2021, AMC’s stock is now at roughly $5.
This story was reported by The Associated Press.