Touch of Market: Meme Stock - a curiosity or a new normality?

At the end of January 2020, the world of finance and (a little later) the whole world watched with bated breath the struggle of a group of rookie investors communicating via the wallstreetbets subreddit with powerful hedge funds playing to the fall in the price of Gamestop shares. After the success of the action (the share price increased several times in a few days), there were motivations completely different than earnings, which is best shown by this widely commented post by one of the users[1]. A matter that at the beginning was purely business-related, with time became very ideological, which probably was not fully understood by people from the world of finance[2]. This approach, which emphasizes ideology, fashion or a specific subculture[3], in my opinion, best characterizes what Meme Stocks are. In the following post I will try to investigate a few companies that we can call Meme Stocks .

What is Meme Stock?

In history, we have had many situations when a specific product or industry became the object of great interest of people who, by investing in a given product, pushed prices to unimaginable levels. A typical financial bubble has several steps[4]:

Displacement - This stage takes place when investors start to notice a new paradigm, like a new product or technology, or historically low interest rates. This can be basically anything that gets their attention.
Boom - Prices start to rise. Then, they get even more momentum as more investors enter the market. This sets up the stage for the boom. There is an overall sense of failing to jump in, causing even more people to start buying assets.
Euphoria - When euphoria hits and asset prices skyrocket, it could be said that caution on the part of investors is mostly thrown out the window.
Profit-Taking -Figuring out when the bubble will burst isn’t easy; once a bubble has burst, it will not inflate again. But anyone who can identify the early warning signs will make money by selling off positions.
Panic - Asset prices change course and drop (sometimes as rapidly as they rose). Investors want to liquidate them at any price. Asset prices decline as supply outshines demand.2.

5. In history, we have had many situations in which this scenario worked (the tulip bubble in the 17th century, the Japanese bubble in the 1980s and the global dotcom bubble at the turn of the century). According to this reasoning, the increase in the value of such assets (Gamestop and the other companies described) is a kind of bubble, I could agree with that, but it differs from the standard bubble by several factors.

In the case of Meme Stock, a key aspect is the dissemination of the internet, which allows the instant creation and retrieval of information. Meme Stock grow like bubble assets. The biggest difference comes from performing online operations that quickly accelerate the fluctuation share price and popularity. Since the increased price is artificial and not the result of actual business performance, these jumps are usually followed by an inevitable breakdown. One Reddit user has created a cycle of existence Meme Stocks[5]:

Early Adopter Phase - handful of investors believe a particular stock is undervalued and begin to buy in large quantities. The stock’s price slowly begins to increase.
Middle Phase - People who are paying attention begin to notice the increase in volume. More individuals then start buying, and the stock’s price skyrockets.
Late/PHOMO Phase - Info about the stock spreads across social media and online forums. Thus, fear of missing out—commonly referred to as FOMO—takes hold, and more rookie investors join in.
Profit Taking Phase - After a few days, buying peaks and the early adopters begin cashing out. Just like the buying phase, the selling phase becomes a chain reaction as people fear losing money. This is where the price goes down.

3. Because of this cycle, it’s the early adopters who really profit from these trending stocks. Once the Meme Stock cycle enters into the FOMO phase, it’s likely too late to make a profit. The life cycle of Meme Stocks is very similar to the life of a Ponzi scheme[6] (however, Meme Stocks euphoria may repeat, which I will write about later). However, in this case, I do not see any artificial price increases or aggressive search for potential investors).

Below I will briefly describe a few companies that we can treat as Meme Stock, of course this collection is much wider and may apply not only to companies, but also raw materials and cryptocurrencies.

Gamestop Corp., (NYSE:GME)

GameStop Corp. operates as a multichannel video game, consumer electronics, and collectibles retailer in the United States, Canada, Australia, and Europe. The company sells new and pre-owned video game platforms; accessories new and pre-owned video game software. The company operates its stores and e-commerce sites under the GameStop, EB Games, and Micromania brands; and collectibles stores under the Zing Pop Culture and ThinkGeek brand, as well as offers Game Informer, a print and digital video game publication featuring reviews of new title releases, game tips, and news regarding the video game industry. As of February 1, 2020, the company operated 5,509 stores across 14 countries. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1996 and is headquartered in Grapevine, Texas.

The development of online sales and other trends meant that Gamestop's operations may be considered non-future, which may be confirmed by the Company's financial results for 2017-2020.

Table 1: Basic Financial data

Mln USD	2017	2018	2019	2020	LTM 01/2021
Revenue	7 965.0	8 547.1	8 285.3	6 466.0	5 089.8
Gross Profit	2 499.9	2 484.9	2 308.1	1 908.7	1 259.5
Operating Income	501.3	444.2	320.5	61.3	-249.3
Net Income	353.2	34.7	-673.0	-470.9	-215.3

Source: Yahoo Finance

As we can see in the table over the last few years, Gamestop is collapsing. The company's revenues fell by 30% over the four years. The company has been recording net losses since 2018 and incurred a loss on operating activities in 2020. Another obstacle for the Company was the lockdown caused by the coronavirus epidemic. In the chart below we can see the price of the Gamestop stock.

Chart 1. Gamestop Quotation

Source: www.stooq.pl [accesed March 26, 2021].

As we can see in the chart except for the period in 2021, we can see a downward trend in Gamestop stock prices due to the weak outlook for the company's operations and, more importantly for us, from the activities of the hedge fund doing short selling - Gamestop has become the most-shorted company in the world (short sale of 140% of shares). While the value of short selling gave the third result in history[7]. Additionally, based on the chart, we can distinguish phases like Meme Stocks.

Gamestop boom history:

The huge boom in Gamestop stocks and the global interest was triggered by online discussions of people unrelated to investment banks. The creators of this action can be considered people who are part of one of the subreddits r/wallstreetbets. The community is known for discussion around high-risk stock transactions. Even before the short squeeze, there had been interest in GameStop. Keith Gill, known by the Reddit username "DeepFuckingValue" and the YouTube and Twitter alias "Roaring Kitty", purchased around $53,000 in call options on GameStop's stock in 2019 and saw his position rise to a value of $48 million by January 27, 2021. Gill, a 34-year-old marketing professional and Chartered Financial Analyst (CFA) from Massachusetts, stated that he began investing in GameStop during the summer of 2019, after believing the stock to be undervalued[8]. One of his arguments was changes in the company's management board and the acquisition of a significant block of shares by the investor Michael Burry, who in 2019 acquired 3.3 percent. GameStop action, which criticized a possible short-squeeze at GME, as in his opinion the company's situation was not as bad as the financial market estimated it. Michael Burry is one of the most interesting people in the world of finance, the man who predicted the 2007 subprime crisis in the US and is the protagonist of the movie Big Short[9]. He shared information regarding his investment on r/wallstreetbets, providing regular updates on the investment's performance, including times when the investment had plunged[10].

Another user, Stonksflyingup, posted a humorous video on October 27, 2020, explaining how a short position by Melvin Capital could be used to execute a short squeeze, using a scene from Chernobyl to illustrate how the hedge fund would blow up similarly to a nuclear reactor[11]. The appearance of many such pictures and manifestos can be considered a complete change. Since then, for some Gamestop stock holders, the goal was no longer profit and the desire to harm large funds that were blamed for the damage caused by the financial crisis of 2008.

In January 2021, Reddit users on the r/wallstreetbets subreddit built the foundations for a short squeeze on GameStop, pushing up the stock price significantly. This occurred shortly after a comment from Citron Research predicting the value of the stock would decrease. The stock price increased 1,500 percent by January 27 over the course of two weeks, and its high volatility caused trading to be halted multiple times. According to Dow Jones market data, more than 175 million shares of GameStop were traded on January 25, the second largest total in a single day, surpassing its 30-day average volume of 29.8 million shares.[12] Some of those investing into the stock were young teenage investors.

Table 2: Gamestop quotation

Date	Price (USD)	Change		Volume
Date	Price (USD)	Net	%	Volume
January 11	19.94	+2.25	+12.72%	14,927,612
January 12	19.95	+0.01	+0.05%	7,060,665
January 13	31.40	+11.45	+57.39%	144,501,736
January 14	39.91	+8.51	+27.10%	93,717,410
January 15	35.50	−4.41	−11.05%	46,866,358
January 19	39.36	+3.86	+10.87%	74,721,924
January 20	39.12	−0.24	−0.61%	33,471,789
January 21	43.03	+3.91	+9.99%	57,079,754
January 22	65.01	+21.98	+51.08%	197,157,946
January 25	76.79	+11.78	+18.12%	177,874,000
January 26	147.98	+71.19	+92.71%	178,587,974
January 27	347.51	+199.53	+134.84%	93,396,666
January 28	193.60	−153.91	−44.29%	58,815,805
January 29	325.00	+131.40	+67.87%	50,566,055
February 1	225.00	−100.00	−30.77%	37,382,152
February 2	90.00	−135.00	−60.00%	78,183,071
February 3	92.41	+2.41	+2.68%	42,698,511
February 4	53.50	−38.91	−42.11%	62,427,275
February 5	63.77	+10.27	+19.20%	81,345,013

Source: Yahoo Finance

After GameStop's stock closed up 92.7 percent on January 26, business magnate Elon Musk tweeted "Gamestonk!!" along with a link to the r/wallstreetbets subreddit[13]. A brief, sharp rise in the share price to over $200 followed Musk's tweet. As of January 28, 2021, the all-time highest intraday stock price for GameStop was $483.00 (nearly 190 times the low of $2.57 reached 9 months earlier in April 2020). In pre-market trading hours the same day, it briefly hit over $500, up from $17.25 at the start of the month[14].

On January 28, more than 1 million GameStop shares, then worth $359 million, were deemed failed-to-deliver. The stock was worth market value was $33.7 billion for that day and it was the highest valued stock on the Russell 2000 index[15].

On January 28, the possibility of concluding transactions for financial instruments related to Gamestop (and several other entities highly advertised by Redditers: AMC Theaters, Blackberry Ltd. and Nokia Corp.) was suspended by Robinhood - an extremely popular app for individual investors. Over the next hours, other trading apps made similar decisions[16].The suspensions of quotations were explained by the inability to provide the relevant securities to the clearing house. Most of the restrictions were released on January 31, 2020, but the biggest stock boom was over.

On February 1 and February 2, the GameStop share price fell significantly, losing more than 80 percent of its value compared to the intraday peak recorded the previous week. GameStop shares lost 60 percent of their value on February 2, closing below $ 100 for the first time in a week. Reports estimated that the company lost approximately $ 27 billion in market value[17].

Despite the decline, some r / wallstreetbets users have come together to persuade other users to stop the shares, arguing that either their value will increase or that doing so will send the political message I mentioned at the beginning. The continued interest of the public allowed the price to be raised at the end of February. Since then, the share price has fluctuated at a similar level, but it should be noted that it is rising rather slowly[18].

The actions popularized by wallstreetbets caused huge losses of hedge funds caught in short parties on Gamestop: Melvin Capital the most heavily shorted in GME lost 53% of value to end of January[19], faced with such losses, the Fund was on the verge of collapse and Citadel LLC and partners invested $ 2 billion in investments by Melvin and Point72 Asset Management, which added $ 750 million, for a total of $ 2.75 billion[20].

In addition to the most media-rich and influential action with Gamestop, there were a lot of companies on the subreddit that were knocked out thanks to all the confusion about Memestocks.

AMC Entertainment Holdings

AMC Entertainment Holdings, Inc., through its subsidiaries, involved in the theatrical exhibition business. The company owns, operates, or has interests in theatres. As of March 12, 2021, it operated approximately 1000 theatres and 10,700 screens in the United States and internationally. The company was founded in 1920 and is headquartered in Leawood, Kansas[21].The company is listed on the New York Stock Exchange;

from 2012 to 2018, the Chinese conglomerate Wanda Group owned a majority stake in the company. Private equity firm Silver Lake Partners made a $600 million investment in AMC in September 2018, but the voting power of AMC shares is structured in such a way that Wanda Group still controlled the majority of AMC's board of directors. Amid financial downturns caused by the COVID-19 pandemic, in January 2021 Wanda's ownership was increasingly diluted due to new financing by AMC, and Silver Lake converting its $600 million debt holding to equity after a short squeeze. In early-February 2021, Wanda converted its Class B shares to Class A shares, thus reducing its voting power[22].

AMC has had average results in recent years. Although in the years 2017-2019 it achieved an operating profit, it only earned on the net profit level in 2018. 2020 turned out to be catastrophic for the company's finances. The conducted activity turned out to be one of the most affected by the pandemic, as a result of which the company recorded multi-billion losses for 2020.

Table 3: Basic Financial data

Mln USD	2017	2018	2019	2020
Revenue	4 230.0	4 769.5	4 875.2	1 015.7
Gross Profit	733.2	897.2	818.6	-723.8
Operating Income	173.6	270.1	209.1	-1 279.6
Net Income	-405.7	96.2	-132.9	-3 751.6

Source: Yahoo Finance

The company had over 9 billion liabilities at the end of 2020, most of them were acquired in 2018 and is related to ownership changes in the Company. The level of debt, which has exceeded 85% in recent years, is also a big problem for the company. At the end of 2020, the company had negative equity in the face of large losses.

Table 4: Capital Structure Summary

	31.12.2017	31.12.2018	31.122019
Total Debt	79.1%	89.5%	133.6%
Total Equity	20.9%	10.5%	34.0%
Total Minority Interest	-	-	0.3%

Source: Yahoo Finance

AMC can be considered a twin of GME - while GME shares are rising, AMC shares are also top. This is because the hype for these actions was filmed in the same place. This is also evidenced by the level of correlation. For the period from December 1, 2020 to March 31, 2021, the r-Pearson correlation is 0.91

Chart 2. GME and AMC Quotation Comparison

Source:www.stooq.pl

The 2020 was extremely hard for the company. On 18 march 2020 AMC announces closure all of its theatres[23]. On March 25, 2020, AMC furloughed all of its 600 corporate employees, including CEO Adam Aron. All furloughed corporate AMC employees and associates retain their active employment status, including all health benefits. During 2020, the company had huge problems related to the lack of action, it also tried to renegotiate or terminate contracts with film studios[24].

The company, however, became one of the beneficiaries of Reddit shares. At the end of 2020, it seemed that we are dealing with a company that will collapse in a moment, apart from the terrible results and the lack of prospects for improvement, the company's situation was also due to a huge debt which resulted from many decisions made by the Management Board of the Company in recent years.

Thanks to the tremendous increase in share prices On January 26, 2021, AMC stated that it had raised $917 million in new funding, including $506 million in equity and new common shares, and commitments for $411 million in debt financing[25]. The next day, as part of a wider series of short squeezes coordinated by the Reddit community r/wallstreetbets (which primarily targeted video game retailer GameStop), AMC experienced a major, 300% surge in its share price to a peak of $20.36.[ The surge triggered Silver Lake Partners' convertible bonds; on January 28, it reached an agreement to convert $600 million of its debt holdings in AMC to equity at $13.51 per-share[26].

Another Meme stock

In addition to GME and AMC, many other stocks experienced significant gains at a similar time, some of which can be considered typical Meme Stocks.

Table 5: Memestock

Security	Sector	Price high	Jan 22	% of Change
AMC Entertainment Holdings, Inc. (AMC)	Cinema	20.36	3.51	480.1%
AMC Networks Inc. (AMCX)	Broadcasting	59.83	49.38	21.2%
American Airlines Group Inc. (AAL)	Airlines	21.77	15.82	37.6%
BB Liquidating Inc. (OTC Pink: BLIAQ)	Specialty Stores	0.30	0.01	3000%
Bed Bath & Beyond Inc. (BBBY)	Homefurnishing Retail	53.90	30.21	78.4%
BlackBerry Limited (BB)	Systems Software	28.77	14.04	104.9%
Build-A-Bear Workshop, Inc. (BBW)	Specialty Stores	8.40	4.52	85.8%
Eastman Kodak Company (KODK)	Technology Hardware, Storage and Peripherals	15.15	9.46	60.1%
Express, Inc. (EXPR)	Apparel Retail	13.97	1.79	680.4%
Fossil Group, Inc. (FOSL)	Apparel, Accessories and Luxury Goods	28.60	9.87	189.8%
Genius Brands International (GNUS)	Leisure Products	3.36	1.57	114.0%
iRobot Corporation (IRBT)	Household Appliances	197.40	98.94	99.5%
Koss Corporation (KOSS)	Consumer Electronics	127.45	3.34	3,715.9%
Ligand Pharmaceuticals Incorporated (LGND)	Biotechnology	191.59	142.62	34.3%
The Macerich Company (MAC)	REIT	25.99	14.58	78.3%
Naked Brand Group (NAKD)	Apparel, Accessories and Luxury Goods	3.40	0.44	672.7%
National Beverage Corp. (FIZZ)	Soft Drinks	196.43	98.44	99.5%
Nokia Oyj (NOK)	Communications Equipment	9.79	4.20	133.1%
Palantir Technologies Inc. (PLTR)	Application Software	45.00	32.58	38.1%
Siebert Financial (SIEB)	Investment Banking and Brokerage	18.50	3.70	400.0%
Tootsie Roll Industries, Inc. (TR)	Packaged Foods and Meats	58.98	30.14	95.7%
Virgin Galactic Holdings, Inc. (SPCE)	Airlines	59.43	34.28	73.4%

Source: Wikipedia, Internet

Entities whose price has significantly increased share prices can be characterized by several similarities:

· Most of these entities operated in sectors of the economy that were particularly affected by the introduced restrictions. Among the companies on the list we can distinguish, for example, airlines, cinema chains or entities dealing in retail trade (the most famous example is probably the symbol - Gamestop. The second group are entities creating innovative products, but in their case the price increase is much lower than those affected by lockdown.

· Most of these entities achieved enormous losses in 2020. It can be assumed that investors investing in these shares expected a very quick opening of the economy, or gigantic public aid for particularly disadvantaged enterprises.

Conclusion

The last year has been extremely volatile in the markets, starting with a pandemic that has turned our whole life upside down as well as the economy - enormous confusion and uncertainty have become something completely normal One of the impacts of the pandemic on our lives has been to accelerate the processes we have seen but seemed to be controlling much longer - up to such phenomena in my opinion, we can include the appearance of Memestocks. In our memory, speculative attacks arise in closed offices of large investment funds, but now thanks to the advent of the Internet - a tool for communication and coordination of activities, ordinary people can operate as the largest financial institutions in the world. Here there are two biggest problems for funds to understand: firstly, that their rival is not individual people, but entities operating almost like such a fund, and secondly, that sometimes for such people profit is not the most important decision-making criterion. I believe that in the long run the number of such stocks will grow and the markets will be even more volatile than now. I believe that in the long run the number of such stocks will grow and the markets will be even more volatile than now.

[1] An Open Letter to Melvin Capital, CNBC, Boomers, and WSB : wallstreetbets (reddit.com) [accesed March 12, 2021].

[2] GameStop speculation is danger to whole market: Massachusetts regulator (cnbc.com) [accesed March 12, 2021].

[3] On the Polish website Wykop, users boasted about their wrong decisions, considering it a "Złoty Sasin" certificate - for buying on the hill and selling in the hole.

[4] Bubble Definition (investopedia.com) [accesed March 12, 2021].

[5] Meme Stock Cycle : wallstreetbets (reddit.com) [accesed March 12, 2021].

[6] https://www.investopedia.com/terms/p/ponzischeme.asp [accesed March 12, 2021]. Ponzi scheme is a financial structure in which the profit of a specific participant is directly dependent on the payments of subsequent participants, standing somewhat lower in this structure

[7] Meme Stock Saga Officially Over? GameStop Short Interest Plunged 70% Amid $20 Billion Loss (forbes.com) [accesed March 16, 2021].

[8] Famed GameStop bull 'Roaring Kitty' is a Massachusetts financial advisor | Reuters [accesed March 18, 2021].

[9] https://en.wikipedia.org/wiki/The_Big_Short_(film) [accesed March 18, 2021].

[10] DeepFuckingValue - Last YOLO update numbers DO NOT MATCH UP!!! : wallstreetbets (reddit.com) [accesed March 18, 2021].

[11] https://www.ft.com/content/3f6b47f9-70c7-4839-8bb4-6a62f1bd39e0 [accesed March 18, 2021].

[12] https://www.wsj.com/articles/gamestop-shares-surge-toward-fresh-record-ahead-of-opening-bell-11611579224 [accesed March 18, 2021].

[13] https://edition.cnn.com/2021/01/26/investing/gamestop-stock-elon-musk-reddit/index.html [accesed March 18, 2021].

[14] https://www.theguardian.com/business/live/2021/jan/28/gamestop-share-surge-sparks-concerns-stock-markets-slide-again-business-live [accesed March 18, 2021].

[15] https://www.bloombergquint.com/technology/gamestop-s-boom-briefly-vaults-stock-to-top-of-russell-2000 [accesed March 18, 2021].

[16] https://www.msn.com/en-us/money/topstocks/robinhood-clients-say-platform-has-removed-gamestop-and-amc-and-is-only-allowing-holders-to-sell/ar-BB1daWJS [accesed April 1, 2021].

[17] https://www.bloomberg.com/news/articles/2021-02-02/gamestop-extends-pullback-with-short-interest-and-volume-sinking [accesed April 1, 2021].

[18] https://stooq.pl/q/?s=gme.us&c=5m&t=l&a=lg&b=0 [accesed April 1, 2021].