Revisiting the Meme Stock Craze

Some lessons are hard to learn. Such is the case with meme stocks. Shares of GameStop Corp. (GME) have been on a run since Keith Gill (aka “Roaring Kitty”) restarted posting about the company on social media last month. The stock jumped 81% between May 12 and yesterday.

The meme stock craze was never about fundamentals. Though Gill originally argued why GameStop was undervalued, he didn’t gain a significant following until he started posting memes and screenshots of his brokerage account in 2020. After going on hiatus in 2021, Gill returned to social media last month by posting more memes. This past weekend, he shared screenshots from his brokerage account showing positions in GameStop stock and June call options.

The volume numbers show how large of an effect those new posts have had. Between January 2 and May 10, 5.8 million shares of GameStop traded on an average day. Daily trading activity since then has averaged 81.5 million shares.

Yet, GameStop’s fundamentals are not great. A walk through the A+ Investor Grades will demonstrate this.

The company’s Value Grade is F in part due to a high price-to-book-value (P/B) ratio and a high ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). GameStop’s shareholder yield is negative because the company’s share count has been rising. Last month, GameStop sold an additional 45 million shares in a secondary offering. The price-earnings (P/E) ratio is nonexistent because the company was barely profitable last year.

Sales have fallen at an 8.6% annualized pace over the past five years. Cash from operations has only been positive during two out of the last five years. The combination explains why the stock’s Growth Grade is D.

Underlying GameStop’s Quality Grade of C are differing indicators. Total liabilities relative to assets have been declining—which is a positive. Despite GameStop’s business challenges, the Z double prime bankruptcy risk (Z) score of 6.57 suggests the company is not at risk of incurring financial distress. The gross-income-to-assets ratio of 47.8% may look good, but it is getting a lift from declining total assets. The company’s return on assets (ROA) and return on invested capital (ROIC) are barely positive because of GameStop’s low level of profitability.

(Looking at a company’s financial statements while analyzing financial ratios provides a clearer picture of a company’s financial strength.)

The Earnings Estimate Revisions Grade is D (negative). The LSEG I/B/E/S consensus estimate for fiscal 2025 has been lowered to $0.010 per share from $0.028 per share three months ago. GameStop will announce its first-quarter 2024 results next week. It has already guided for a drop in quarterly sales and a net loss.

The final A+ Investor Grade is the Momentum Grade. Gill can take credit for the stock’s very strong Momentum Grade of A. During the last 13 weeks, shares of GameStop have outperformed 98% of all stocks. However, the stock fell in value during each of the three prior quarters.

Overall, these grades don’t paint a favorable picture of the stock. What they do show is the importance of doing your own analysis. Sadly, the mistakes many in the meme stock crowd made before are occurring again.

Influencers and the Ethics of Disclosure

E-Trade is reportedly considering closing Gill’s brokerage account over potential stock market manipulation. The Wall Street Journal says Gill bought “a large volume of GameStop options” prior to resurfacing on social media.

This is not the first time that questions about an influencer’s conflict of interest have been raised and it won’t be the last. There is a long history of people talking up stocks for their own benefit. I can’t say whether Gill purposely sought to boost the value of holdings with his latest posts, but the uncertain timing of the transactions raises red flags.