Meme stocks are in the spotlight this week. Other companies like GameStop and AMC have experienced significant volatility this week, rising and then falling in just two days. These so-called meme stocks have gained popularity through social media platforms such as Reddit and X (formerly Twitter), attracting retail investors looking for quick profits. The “meme stock” frenzy that emerged in 2020 and 2021 involved investors targeting short sellers and hedge funds who were pessimistic about companies like GameStop, forcing them to cover short positions and drive up the price of the target stocks. The Future of Meme Stocks An analyst who has previously been bearish on GameStop and technology stocks said that despite improving fundamentals for the stock, GameStop remains in “danger territory.” David Trainer, CEO of investment research firm New Constructs, said GameStop has previously appeared on his list of so-called “zombie stocks.” He defined such stocks as potentially falling to $0 because they “lack sufficient cash to sustain long-term cash burn and may go bankrupt or have to raise new capital, significantly diluting shareholder equity.” “[We]highlighted GameStop’s meme-sock-driven surge in valuation, lack of profitability relative to peers, and increasing (free cash flow) burn,” he told CNBC Pro this week. Trainer noted that the company has since The company has raised more than $1 billion through a 2022 stock offering. He said: “The issuance more than doubled its cash on hand, which, coupled with positive free cash flow during the TTM period, significantly increased its cash burn runway to over 69 months (based on 2-year average free cash flow burn) “As a result, GameStop no longer qualifies as a zombie stock,” he said. But Traynor warned that GameStop remains on his “danger zone” inventory list. He defines such stocks as stocks that are likely to see their share prices fall significantly (not to $0) because their valuations are “unreasonably high” relative to their “very poor” cash flows and profits. ‘Danger Zone’ Stocks Here are some other stocks in Traynor’s “danger zone” list, which also includes his “zombie stocks.” They are: AMC Entertainment Holdings, DoorDash, Robinhood, Tilray Brands and Beyond Meat. Traynor believes AMC is “not even worth” $1 a share because it’s “nowhere near what the stock valuation implies.” The stock closed Wednesday at $5.48. He noted that while its free cash flow will be positive in 2023, that’s the result of asset harvesting rather than improved profits. Trainer said the key results from DoorDash’s first-quarter earnings report may “look positive on the surface,” but they “mask the persistently unprofitable nature of its business.” He noted “continued deterioration” in its fundamentals, including “unsustainable” spending and ongoing cash burn. As for Robinhood, he said the company burned through $7.8 billion in free cash flow from 2020 to 2022 (excluding acquisitions). “The cost of raising additional capital to fund this cash-burning business could be high, especially as the cryptocurrency market cools and Robinhood’s growth slows,” Trainer said. “Robinhood’s once-high growth has slowed significantly, making Its cash-burning business looks even more concerning. Traynor said Beyond Meat’s share price could fall further due to falling revenue and “unsustainable cash burn.” a competitive disadvantage in a crowded industry; and “unrealistic expectations” that it could improve profitability while more than doubling market share. —CNBC’s Li Yun contributed to this report.
