A meme stock refers to shares of a company that have gained viral popularity due to heightened social sentiment, often driven by online communities. Does it make sense to invest in meme stocks? We share our insights.

Meme stocks – do they have value for investors

Meme stock is a stockwhose value was driven more so by social media enthusiasm as opposed to any sort of underlying financial metrics. The first widely recognized meme stock was GameStop (GME), which experienced a dramatic price increase as its meme community orchestrated a short squeeze. Another good example of meme stock isBed, Bath & Beyond,sought bankruptcy protection last year.AMC Entertainment (AMC): AMC, a movie theater chain, became a meme stock in early 2021. Retail investors rallied around it, leading to significant price volatility.BlackBerry (BB): BlackBerry, known for its smartphones, experienced a resurgence in popularity as a meme stock. However, its fundamentals remain uncertain.Nokia (NOK): NOK gained attention on Reddit forums, but its long-term prospects are still debated.

Despite the potential for short-term trading gains, as evidenced by traders posting screenshots of their profits during surges, meme stocks can be risky investments. Without their cult-like followings, these stocks are not necessarily considered valuable assets (NerdWallet). In fact, some experts suggest that investors may be better off investing their money elsewhere, as the hype-driven nature of meme stocks can lead to unpredictable market behavior and potential losses.

Some institutional investors may include meme stocks in their portfolios. However, their exposure to these stocks in most cases is minimal. Institutional investors approach meme stocks with caution. They prioritize fundamental analysis, risk management, and long-term strategies. While some may include meme stocks in their portfolios, they typically allocate a small portion due to the speculative nature and volatility associated with these stocks. 

Institutional investors prefer investing in sentiment stocks rather than memes

Sentiment stocks and meme stocks are related but not identical. there is a clear distinction:

Sentiment Stocks:

• These stocks are influenced by investor sentiment, market psychology, and emotions.
• Sentiment stocks can be bullish (positive sentiment) or bearish (negative sentiment).
• They respond to news, social media trends, and overall market mood.
• Examples: Tesla, Apple, and Amazon. Especially, sentiment-driven strategies look good-performing after the earnings results of a company.

Meme Stocks:

• Meme stocks gain popularity due to online communities and viral social media attention.
• They often experience extreme price volatility driven by coordinated retail investor activity.
• Meme stocks are characterized by increased speculative news, most of them might be faked news or rumors.

How to recognize a meme stock?

Traditional investors define real investments as those based on sound financial principles, company fundamentals, and long-term growth potential. Meme stocks by definition, see their prices driven up by hype and social media influence rather than these traditional factors.

Exposure to meme stocks via diversified ETFs

Despite high risks some investors try to get exposure to meme stocks. The best way to invest in meme stocks is via meme dedicated ETFs.

One notable meme ETF is the Roundhill MEME ETF (MEME). Here are the key details:

• Objective: The MEME ETF seeks to track the performance of “meme stocks.” These are equity securities of companies with elevated social media activity and high short interest, both indicators of market sentiment.
• Composition: At least 80% of the fund’s net assets are invested in meme stocks.
• Top Holdings (as of the latest data):
  • Affirm Holdings (AFRM)
  • Coinbase Global (COIN)
  • Riot Platforms (RIOT)
  • Marathon Digital Holdings (MARA)

Meme stocks ETFs look similar to meme crypto ETFs

Meme ETFsandmeme crypto ETFscan share some similarities in that they both may capitalize on trends fueled by social media and internet hype. Both types of funds might focus on assets that have gained popularity or notoriety through viral movements or endorsements by internet personalities and online communities.

However, there are key differences. Meme ETFs would typically comprise meme stocks. The focus of the meme stock ETF is not on fundamental value but on social media popularity. From this point of view, we believe that meme stocks are not good investments in along-term portfolio.

On the other hand, a meme crypto ETF would focus on cryptocurrencies that have gained meme status, such as Dogecoin or Shiba Inu. These cryptocurrencies often start as jokes or as a commentary on the cryptocurrency ecosystem but can gain substantial followings and market capitalization. A meme crypto ETF would hold a basket of such currencies or related assets. For example,VanEck has introduced the MarketVector MEMECOIN Index, which tracks the performance of top meme tokens. This index includes well-known meme coins like Dogecoin (DOGE), Shiba Inu (SHIB), and Pepe (PEPE), among others.Over the past year, the MEMECOIN Index has seen a staggering increase of over 195%, outperforming Bitcoin’s rise of 123%. As meme coins continue to capture investor attention, this index provides a tool for tracking these unique digital assets.

Both meme ETFs and meme crypto ETFs are speculative and can carry a high level of risk due to their reliance on social sentiment rather than fundamental financial performance. Investors in these ETFs should be prepared for significant price swings and should consider them as part of a diversified investment strategy.

Our view

Despite possibility to realize triple-digit returns by investing in meme stocks, we would recommend investors to be cautious and take into account the highly-speculative nature of these investments. We believe that meme stocks are not appropriate for a long-term investment portfolio. A meme stock might be attractive only if it carries fundamental value in addition to social media news. It is recommended to conduct thorough research to understand if a meme stock has solid financials and bright long-term prospects. Just like with major cryptocurrencies, we would suggest allocating only a very small portion of funds into meme stocks.

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