The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble

GameStop is a struggling, kind of boring, mid-size retailer stuck in a legacy business — selling physical video games. But it’s also pretty much the only company anyone on Wall Street is talking about right now after its stock rose 160% in a matter of hours on Monday morning to an all-time high of $159. (By day’s end, GameStop’s price had been cut by more than half, but that still left it up more than 300% this year and almost 3,000% from its 52-week low. And it was up another 15% at Tuesday’s open.)
It isn’t GameStop’s precipitous rise, impressive as that’s been, that has everyone fascinated. Instead, it’s what is fueling that rise: concentrated buying by thousands upon thousands of small individual investors who are using sites like Reddit and Robinhood to drive up what are now being called “meme stocks.” GameStop is the best-known of these meme stocks, simply because its gains have become so outrageous. But it was preceded last year by Hertz and Kodak, which, despite having struggling businesses, saw their stock prices soar when they became Reddit darlings. And now stocks like AMC, Nokia, and Blackberry (which is, yes, still in business) have also caught Redditors’ fancy.
It’s easy to see the meme-stock boom as just a speculative bubble, and evidence of how the current stock market has lost touch with reality. Speculative bubbles in so-called “story stocks” are, after all, familiar things on Wall Street. In the late 1950s, uranium stocks soared, followed a few years later by bowling stocks, and then RV stocks. (In 1969, a company called Skyline Homes saw its shares rise twentyfold.) And we all know what happened to internet stocks in the late ’90s. But in fact, what’s happening with meme stocks is very different from those previous crazes.

In a classic speculative craze, investors may take cues from each other — the fact that everyone is buying internet stocks makes you think it’s smart to buy internet stocks — but they’re not working together to make stock prices rise.
With meme stocks, on the other hand, that’s exactly what’s happening: The small investors on the r/Wallstreetbets subreddit (which has 2 million subscribers) and other sites are taking part in a conscious collective effort to drive the prices of these stocks up. No one is in charge of this effort, though, of course, some voices are louder than others. But it is a self-organized campaign with people using the message boards to communicate with each other, encourage each other, and reassure each other (thus the many posts on r/Wallstreetbets admonishing fellow “autists” — their self-mocking term for each other — to not lose their nerve and to keep holding GameStop’s stock). Thus threads with titles “We are the captains now,” “Have no fear, GME gang. We are consolidating in preparation for tomorrow’s moon landing,” and “GME — it never has to end.”
In other words, what’s happening with GameStop looks less like a speculative bubble and more like a contemporary, internet-mediated version of the “bull raids” that were characteristic of the stock market in the early 20th century, when organized pools of investors would combine to drive stock prices up.

How are they doing it? By embracing companies that Wall Street, for good reason, hates: beaten-down firms in legacy businesses with weak economic fundamentals. The Redditors don’t love these companies because they think their future prospects are genuinely great, even if in most cases there’s been some catalyst that suggests the underlying business could improve going forward. Instead, what meme stocks all have in common is that they start off with a cheap stock price and a relatively low market cap, and they’re heavily shorted, meaning that hedge-fund managers are betting that these stocks are going to fall. (GameStop, for instance, was and still is one of the most heavily shorted stocks on Wall Street.)

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Both of those factors have been key to the success of these meme campaigns. First of all, stocks with single-digit prices tend to be more appealing to individual investors (even though the nominal price of a stock shouldn’t affect your willingness to buy it) because it’s more fun and easier to imagine making a lot of money quickly if you own 100 shares of a $4 stock rather than one share of a $400 stock. And because these companies have relatively small market caps and low floats (meaning not that many shares are outstanding), concerted buying pressure from individual investors can more easily move the price.