Smith Brain Trust / August 30, 2021

The ‘Still-Weird’ Market for Meme Stocks

The ‘Still-Weird’ Market for Meme Stocks

Before COVID-19 disrupted business at brick-and-mortar stores, GameStop already was struggling. A shift was under way. Gamers were downloading games directly to their consoles instead of purchasing, in-store, new and used video game software and hardware.

Then, something wild happened. In January of this year, GameStop’s stock price surged to $483, from about $5, riding an intense buying wave driven, in large part by Reddit’s WallStreetBets message board. Users of the popular message board had organized to inflate GameStop’s share price and to profit from it – all the while disrupting institutional investors who had shorted the stock. GameStop had become a so-called meme stock, its stock benefitting from retail investors, in a frenzy fueled by social media and via platforms such as RobinHood.

And with recent reporting of some meme stocks thriving and GameStop “sticking around,” Maryland Smith’s David A. Kirsch recently told Slate that these stocks must be taken seriously as instances of new market behavior with long-run consequences that are still unfolding. Meme-stock companies raised significant money from their valuations in a moment of entrenchment, he said in ‘The Stock Market is Still Weird.’ “This has been a real phenomenon… This is not just a kind of short-term [thing].”

What does this mean for a company like GameStop? On one hand, Kirsch, associate professor of management and entrepreneurship, pointed out that retail investor interest will wane thus so will “meme stock” status. So, on the other hand, the company can leverage its inflated stock price into tangible improvements to its business operations and subsequently make its stock valuable. A model for the latter is Tesla – “the mother of all meme stocks,” he adds, noting to Slate that “Elon Musk moves markets with his tweets, has cultivated a huge fan base online, and has regularly used a surging share price to issue new stock (at the elevated price) to raise billions of dollars for his company.”

Such a foundation separates Tesla from the Redditor-borne stocks, like GameStop. And when the latter’s shares jumped in early 2021, Kirsch said, “I remember thinking, ‘Wow, if I were that CEO, I’d try to print some stock at this price as fast as possible.’”

Although raising funds – selling stock from the corporate treasury – when the share price is high can send a negative signal to existing shareholders, GameStop did just that and significantly strengthened its position by raising more than $1 billion. “It’s impossible to argue that the new resources don’t change the dynamic going forward,” Kirsch said. “GameStop without a billion dollars is just kind of a flailing, languishing mall stock. With a billion dollars, maybe it’s a total relaunch. Right? A billion dollars is a hundred series A rounds. That’s a lot of pivots, a lot of new bets, a lot of R&D. You can do a lot with a billion dollars.”

Ultimately, the ascent of GameStop and other meme stocks cannot be dismissed as mere, short-run distortions from fundamental value or some other type of microphenomenon, said Kirsch, co-author of “Bubbles and Crashes: The Boom and Bust of Technological Innovation” with faculty colleague Brent Goldfarb. “These narratives have changed economic outcomes, and so if that’s the case, then you have to take the movement perspective seriously.”

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