Meme stocks can get a bad reputation. They’re really just stocks that are promoted heavily on social media, notably Reddit. Now, you’ll find a few quality stocks among these meme stocks. The problem is that for as many meme stocks you’ll find are buys, there are several more meme stocks to avoid.
The allure of high-risk meme stocks is that the stock price of these companies is generally beaten down. Therefore, it won’t take much to generate outsized returns. This risk-return dynamic was on display in 2021, when a good story was all it took to power a stock higher.
Of course, the opposite is true as well. For many of these companies, the risk of bankruptcy is far from non-zero. And some of these companies have business models that carry existential risk.
As the market rally begins to expand beyond the “Magnificent 7” stocks, fear of missing out (FOMO) is starting to rear its head once again. However, this is still a time when quality matters. The stocks on this list don’t meet that standard, and that’s why you should have them on your list of meme stocks to avoid.
GameStop (GME)
GameStop (NYSE:GME) is the original meme stock. Indeed, it’s fitting that the word “game” is in the company’s game. That’s because through no fault of the company, the bulls and bears continue to gameify GME stock. The question that investors have to ask is, why?
The bullish thesis for GameStop is that the company was going to successfully pivot away from being a declining bricks-and-mortar store that sells hardware, vintage video games, and other accessories. And on the surface, the company’s push into areas like Web 3.0 gaming and NFTs makes some sense.
That’s not showing up on the company’s balance sheet. Notably, Executive Chairman Ryan Cohen has said the company is pivoting back to focus on its brick-and-mortar operations. But if reports are to be believed, that focus includes promotions that are more or less giveaways in an effort to boost sales.
But hope is a powerful thing, and it’s this hope that’s powered GME stock 27% higher in 2023. Short interest is over 18% for GME stock, and many investors believe conditions could be right for another short squeeze. However, that’s a tough way to make money. And it’s one of the reasons why GME stock continues to be on this list of meme stocks to avoid.
AMC Entertainment (AMC)
AMC Entertainment (NYSE:AMC) was the twin of GameStop in 2021. The thesis for AMC was that the flight from movie theaters was “transitory” and that consumers would return once pandemic restrictions ended.
The bears took the other side of that argument, pointing to consumer preferences that are now shifting to streaming services. And let’s face it, if you’ve added a multi-media room to your home, as many did during the pandemic, you want to use it.
This could be an example of both arguments being right. Yes, some consumers are coming back to the theaters. But it’s also true that they’re not coming back nearly in the numbers that the company needs to become profitable.
Additionally, the company’s business model will be under even more pressure soon, due to the writer’s guild (SAG-AFTRA) strike in Hollywood. While this will ultimately affect streaming companies as well, it’s going to have a more immediate impact on a company that depends on new content.
AMC stock surged to an all-time high in June 2021. However, with a couple of brief spurts, the stock is trading below $5 per share, which is close to where it was at the beginning of 2020. That means that investors will have to evaluate the stock on its merits, and there’s just not enough there.
Coinbase Global (COIN)
Next on this list of meme stocks to avoid is Coinbase Global (NASDAQ:COIN). Anytime you’re under investigation by the Securites & Exchange Commission, it should be considered bearish for a stock. And that’s the biggest issue facing COIN stock right now.
Unfortunately, it’s not the only issue facing investors in COIN stock. As my InvestorPlace colleague, Muslim Farooque recently wrote, the company faces a separate lawsuit being backed by 11 states which “compels Coinbase to justify its operations and defend its right to continue trading cryptocurrencies.”
To be fair, the company’s business model (and share price) is dependent upon the price of cryptocurrencies, which are notoriously volatile, remaining high. However, in my mind, that’s neither good nor bad. Investors who are buying COIN stock should know the risks involved.
And putting the lawsuits aside, many investors have been treated to a nice gain over the last 12 months. But Barclays has recently warned that Coinbase is overvalued. The analyst downgraded the stock and issued a $70 price target, more than 30% below where the stock price is trading, at the time of writing.
Coinbase may wind up having the last laugh. However, relying on a bullish outcome to the company’s litigation concerns seems more risky than investing directly in cryptocurrencies themselves.
Peloton (PTON)
The bullish case for Peloton Interactive (NASDAQ:PTON) is similar to GameStop, but with potentially a happier ending. That ending, however, may not justify the company ever being a stock that trades much higher than it does today, around $9 per share.
Peloton began trading publicly in 2019. It immediately got embroiled in a marketing controversy over its 2019 holiday commercial. If only the company’s current problems were that silly…and simple.
As investors realize, fitness equipment like the company’s exercise bikes and treadmills are one-off purchases. That makes for tough yearly and even quarterly comparisons. In its most recent quarter, revenue was down 22% from the same quarter in 2022. And that quarter was down 6% from 2021.
You see the problem. Peloton’s solution is to lean into its existing subscription service, fitness-as-a-service, if you’d like. This tiered app will give consumers the Peloton experience “for anyone, anywhere” even for those that don’t own Peloton equipment.
As I noted above, the strategy has a chance to work. But there’s enough risk in this market. And there are better stocks to take that risk on.
BlackBerry (BB)
BlackBerry (NYSE:BB) was once to mobile devices as Kleenex is to facial tissue. But those days ended with the launch of the iPhone. Today, the company is a cyberscurity/internet of things (IoT) company, and a struggling one at that.
At a time when many cybersecurity companies are making money hand over fist, BlackBerry saw its revenue from the sector drop by 18%. And what made the number even more ominous was that it posted a decline in recurring revenue.
So how did it beat revenue expectations? It sold off patents from its once iconic smartphones.
Without that, the company would have posted a loss and the share price would undoubtedly have crossed below the psychologically important $5 per share level. As it stands, the stock is barely above that mark at the time of this writing.
Like other stocks on this list, the company is in the midst of a pivot. And like those other stocks it could work out. But if you’re going to have FOMO, at least have it for a company that’s offering more hope than hype. Declining revenue suggests you can wait on BB stock.
Mullen Automotive (MULN)
For a brief moment in February 2023, Mullen Automotive (NASDAQ:MULN) looked like it might be headed for a GameStop moment. MULN stock more than doubled from trading right around $5 at the beginning of November to over $10 in early-February. Short interest was high and the squeeze was on.
The stock has failed to hold that momentum. And today MULN stock trades for literally pennies on the dollar. The company says its latest capital raise (pardon me, share repurchase) of $25 million has cleaned up its debt, while setting a moratorium on any more share dilution.
That’s doing nothing to sooth investors nerves. This is particularly true, since the company doesn’t have a car in production.
Mullen is a proxy for many of the EV start-ups that went public in 2020 and 2021. There’s a lot of hope, particularly since the auto industry is shifting to electric vehicles whether consumers want them to or not. But this is a capital-intensive business. And right now, it’s hard to believe Mullen has the power to raise the capital needed to survive, let alone thrive.
Beyond Meat (BYND)
Beyond Meat (NASDAQ:BYND) is last on this list of meme stocks to avoid. The company burst onto the scene in 2019, and had a first day closing price of over $100 per share. Beyond Meat was the tip of the synthetic biology spear, and the idea was that we would all soon be eating plant-based meat and liking it.
But from the outset, the company has faced a simple problem that goes beyond taste. To be transparent, I’ve never tried the product and have no idea what my palette would think of it. But I do the shopping in my house, and I know I can’t stomach the price.
There you have it. It’s more expensive than ground beef. And this was true even as the price of ground beef remained elevated during the pandemic.
Revenue in its last quarter was down 15% on a year-over-year basis. Although earnings are expected to improve on a full-year basis, the company will still not be profitable. The company is running out of cash, and the next quarter it posts a profit will be its first.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.