So-called meme stocks, such as Trump Media & Technology Group, Reddit, and GameStop, have been gaining attention recently due to their strong retail participation. Trump Media made its market debut with a market capitalization of about $9 billion, despite having revenues of only $3.3 million and a loss of $49 million in the first nine months of the previous year. On the other hand, GameStop, which had revenues of $5.2 billion and a small profit, has a market cap of about $4 billion. Reddit, with a market cap of approximately $9 billion, has surprised many by nearly doubling its initial public offering price within days of its debut. The commonality among these meme stocks is a high retail investor base, which tends to be more emotional and less concerned with traditional metrics like fundamental analysis.
Fundamental analysis is essential when it comes to investing in stocks, as it helps determine the correct price of a stock based on estimates of future profitability and dividends. Despite the hype around meme stocks, the laws of investing have not been repealed. Stocks represent ownership in a company and entitle shareholders to a claim on the company’s earnings and assets. The Dutch East India Company, the first modern stock company, promised shareholders a share of profits from the spice trade. This principle has remained constant throughout the history of stock companies, emphasizing the importance of fundamentals in investing.
GameStop, one of the meme stocks that gained significant attention in early 2021, has experienced a decline in its stock price following disappointing sales and a drop in hardware sales. Michael Pachter of Wedbush noted that the company is facing challenges due to fewer large console releases and the growth of video game subscription services. While GameStop is not in immediate danger of going under, Pachter believes that the company may face demise within the next five years. Despite the ups and downs of meme stocks, fundamentals ultimately play a crucial role in determining the long-term success of a company.
Back in the 1990s, investing advice based on astrology, sunspots, or other unconventional methods was not uncommon. However, ultimately, fundamentals do matter in investing, and the success of a stock is determined by factors such as profitability, growth potential, and market dynamics. While meme stocks like Trump Media, Reddit, and GameStop may attract attention and speculation, investors should still consider fundamental analysis and long-term prospects when making investment decisions. The story of meme stocks may have its moments of hype and excitement, but in the end, fundamentals remain a key factor in determining the true value of a stock.
