Thanks to the internet, we seem to be living in an era defined by memes. Although memes have been around forever (think “Kilroy was here”), the internet has made them ubiquitous and turned them into a new standard of social communication. Memes are born out of everyday catchphrases, movie screengrabs, or repurposed YouTube videos as parodies, a way of making fun of or criticizing something, somebody, or life in general (think Grumpy Cat). They’re often funny, and the good ones go virtually ballistic.
It was only a matter of time before memes permeated the world of investing. For the investors who participate in meme investing, it’s all fun and games—except when someone gets hurt, and someone always gets hurt.
The GameStop and AMC Memes
You’re probably familiar with the GameStop and AMC fiascos. These were investing memes launched by a large, digitally connected group of twenty-somethings with pockets stuffed full of stimulus checks. Out of pure spite, they bought up shares of these two companies that professional investors were betting against through short selling. Their collective efforts managed to reverse the downward trajectory of these stocks and drive their prices to record highs, creating a short squeeze on hedge fund managers who lost millions. However, they weren’t the only ones who were hurt. When the market caught on to what was happening, the buyers exited the floor, causing the stocks to plummet. The fools who bought in on the meme late in the game lost everything.
All of these meme investments have a few things in common that should give any serious investor pause. They are all fundamentally void of any redeeming investment qualities. As a brick-and-mortar retailer, GameStop (GMT) has become a relic, as evidenced by its declining revenues. The same for AMC (AMCX), a large national movie theatre chain, which is essentially bankrupt following a year-long shutdown of movie theatres. In both cases, there is no fundamental belief that the companies are doing well. Both companies were ripe for short-selling, and the investment pros took advantage.
Meme Investing is the Greater Fool Theory in Action
As creators of memes do, these young speculators set out to create an investment meme to make a joke out of a privileged group of people—in this case, the elite professional investor class, and it worked very effectively. They succeeded in driving the prices of these stocks to historic highs, forcing short-sellers to jump ship and buy back their shares. That drove the stocks’ prices to the stratosphere, setting the “greater fool theory” trap for unsuspecting retail speculators. The greater fool doesn’t invest in a business based on fundamentals. They throw money at a stock hoping that there is another fool willing to pay a little bit more. When no more fools are willing to pay more, the stock price comes crashing down.
It’s not just the last couple of fools who lost their money. The thousands of fools who jumped in before them lost a lot of money as well. The only ones who make out in these scams are the ones who launched them and got out early.
Are GameStop and AMC Redeemable as Investments?
Interestingly, both stocks are still trading well above their 52-week lows. In both cases, the fundamentals don’t come anywhere near to supporting their valuations. But their elevated stock prices may have attracted another class of investors—those who believe the companies’ newfound equity might help fund a turnaround. AMC is taking advantage of its higher stock prices to raise capital with a new stock offering, and GameStop is using its newfound wealth to pay down debt.
Is it possible that their massive stock gains become a self-fulfilling prophecy? Could this windfall of capital be the genesis of a complete turnaround for these companies? It wouldn’t have been possible just six months ago, but now it is. Have GameStop and AMC moved out of the realm of speculation to become investments?
Sadly, the answer is no. As an investor, I am still more concerned with getting a return of my money than getting a return on my money. Even with a billion dollars of new capital to work with, there is still no assurance of getting a dime back at these high valuations.
The key to successful investing is understanding how you will get your money back—how the company will generate the necessary revenues and convert them to sustained profits to drive shareholder returns. I don’t know very much about the movie theater business and probably less about the video game industry. But, based on the amount of money being thrown at these companies and the amount of change that’s required to turn the companies around, I think by any reasonable definition, you would have to categorize these companies as startups—or re-startups.
Granted, they have some intellectual capital. They have the benefit of a brand name. But consider this: If they were worth anything meaningful, wouldn’t they have already been acquired by another company? While they do have tangible and intangible assets, are they worth the hundreds of millions or billions of dollars in their current valuations? If they were, they would have been leveraged for that value.
So, what we have with AMC and GameStop are two incredibly well-packaged startup companies, and startups are almost always highly speculative. Just because they have familiar brands and managers whose names we know, they have the same odds of failure as any other startup.