GameStop (GME) is an American brick-and-mortar video game retailer. In the digital age, when video games can be readily downloaded, they don’t appear to have an obvious utility value. For GameStop, the fate of Blockbuster should be portentous – online streaming services routed the film rental giant – and GameStop’s physical products should be just as vulnerable. But a hardened band of fans, not yet ready to let go, are fighting back. And in just two days, they have cost short sellers $2 Billion.

Why is GameStop stock surging? 

In 2017, GameStop had around 6,600 stores worldwide; today, it has around 4,000. The chain has faced stiff competition from online platforms like Xbox Live and Steam, which have done to the video game market what Netflix has done for cinema. In 2018 the firm recorded its biggest ever loss – $673 million in 52 weeks. 

Despite the odds, GameStop’s decline seems to have halted. In 2023, the company recorded profits of $6.7 million, a significant turnaround. This success can be attributed to a combination of diversification and the unwavering support of a fan base who saw value in the business model. Once again, some of these fans have taken a stand against short sellers who bet on GameStop’s downfall.

Spurred on by Keith Gill, better known by his online persona Roaring Kitty, investors piled into the stock on Monday, May 13, forcing GameStop shares up over 70 percent in the morning trade. In just one day of trading, short sellers were down almost $1 Billion. On Tuesday, short sellers reportedly suffered a further $1.3 billion loss, as online influencers threw their weight into the campaign. 

But this isn’t the first time Gill has led investors into the breach—in 2021, he is credited with helping lead a similar charge that left hedge funds with short positions in a tailspin. Formerly a prolific Twitter user, Gill had not used the platform, now known as X, for three years until Monday, when he posted a meme spurring his followers into action. 

GameStop’s stock surge isn’t following the ordinary laws of the market. The company hasn’t announced a brilliant innovation or revealed a terrific earnings report. Its growth is led by an arbitrary surge in buying, motivated by a desire to hit the hedge funds, nostalgia, and those just joining in with the meme. 

What is a meme stock?  

A meme stock is a term used to describe a stock that experiences a sudden and often extreme increase in trading activity. These stocks are typically driven by internet communities, social media platforms, or online forums rather than traditional financial analysis or fundamentals. These stocks often gain attention and momentum due to viral online content, jokes, or memes rather than any substantial changes in the company’s underlying value or performance.

The rise of meme stocks is closely associated with the democratisation of investing facilitated by online trading platforms and social media. Platforms like Reddit, particularly its subreddits such as r/WallStreetBets, have played a significant role in fuelling the popularity of meme stocks. Users on these platforms share investment ideas, discuss trading strategies, and often collectively rally behind certain stocks, creating a powerful and sometimes volatile force in the market.

GameStop is one of the most famous examples of a meme stock. In early 2021, a group of retail investors on Reddit organised a massive buying campaign, driving up the stock price of GameStop, a struggling video game retailer, to unprecedented levels. This phenomenon, often referred to as the “GameStop saga,” captivated global attention and sparked debates about market dynamics, short selling, and the power of online communities in financial markets.

Meme stocks are characterised by their extreme volatility and rapid price movements, which can create significant opportunities for quick profits and pose substantial risks for investors. Because the trading activity surrounding meme stocks is often driven by social media sentiment rather than fundamental analysis, their prices may not reflect the true value of the underlying companies. Consequently, investing in meme stocks can be highly speculative and unpredictable, requiring careful consideration and risk management.

Are meme stocks worth the risk? 

Meme stocks aren’t investments; they are gambles, a top asset management boss warned on Tuesday. Nigel Green, CEO of the deVere Group, cautioned would-be investors if they were tempted by the stock surge, they might be ‘burned by the frenzy.’ Commenting, Mr Green said:

“I would urge everyone to exercise maximum caution with meme stock trading that’s being fuelled by social media. Of course, big, big money can be made by some. But let’s be very clear: this is highly speculative, and valuations can be expected to be incredibly wild – in both directions. To my mind, it’s more gambling than investing.
 
“Gambling is not the same as investing, and for me, this is gambling. Understand the real risks to your money.”

However, Mr Green said the fad had a road to run and predicted the craze could continue to play out over the summer. He said:

“I think this frenzy is going to run all summer, with the likes of influencer Andrew Tate, among others, involved. Their power is immense, and it is going to be a rollercoaster.”

Mr Green’s warning was echoed by fund manager Cole Smead, who told CNBC the stock surge was a result of ‘young people being stupid.’ Speaking to the network’s Street Sign programme, Smead said:

“It is gambling; we have the biggest casino in the world. Fool me once, shame on you, fool me twice, shame on me – there’s going to be a lot of ‘shame on me’, and you have to remember these are young people, 40-year-old people like me, who are going out and doing stuff that is just frankly stupid.”

AMC stock up 100 per cent 

GameStop isn’t the only beneficiary of Roaring Kitty’s war cry – with shares of AMC theatres up 100 per cent on Tuesday and short sellers left reeling. Like GameStop, AMC, which operates hundreds of cinemas, faces the same challenges from online-only competitors – and is enjoying robust support from its own analogue-loving praetorian guard and meme stock coattails. 

Investor Place declared, “The meme trade is back, baby!” after shares in the cinema chain doubled in a day, seeing the company reach a market cap of $3 Billion. Explaining the phenomena, Dana Blankenhorn wrote for the outlet:

“The math of the meme trading game remains the same. You make money so long as other traders are bidding the stock up. Once they sell, shares fall back to fundamental values, and those left holding them are out of luck…

“Your cue for when to get out will be in the trades themselves. If you can’t follow them closely, it’s best not to play. Good luck!”

The firm had been slapped with a ‘sell’ rating by Citi, with analysts citing the Covid pandemic as leaving a dent on cinema-going habits and challenges from streaming services. But that didn’t stop eager memers defying all logic to boost the share price – piling in after AMC sold $250 million of its shares at an average of $3.45 each. 

Can I make money on meme stocks? 

While it is possible to make money on meme stocks, they shouldn’t be considered serious investments of the kind you would make to secure the future of yourself and your loved ones. Rather, if you really must get involved in a meme stock, it should be understood as that a meme and a gamble. As Jim Osman writes for Forbes,

“The substantial hazards outweigh the attractiveness of making fast money with meme stocks.”

Investors should be thinking about spending time in the market instead of timing the market – which those now jumping onto meme stocks are attempting to do. It’s like a game of hot potato you would do well not to lose. If you are considering investing, be sure to consult a financial expert before making any investment decision.