Wall Street's New Pyramid Schemes

​Meme stocks are all the rage today. For those in the older generation, a meme is a picture used to signify a cultural thought or movement. Memes have always existed, but they have gained popularity with social media that allows a single image to quickly carry a message throughout the world.

Meme stocks are companies whose price is based more on a social media phenomenon than on actual value. It seems odd to some of my generation why anyone would invest their money without considering underlying value, but we must remember that we were the ones that bought over 1.5 million pet rocks in 1975. Each generation has its irrational moments.

More related to the meme stock craze might be the chain letters that circulated long before the internet. A typical chain letter asked the receiver to send $5 to each of the ten names on a list, add their name to the top of the list while removing the last name, then send the letter out to 10 new people. If everyone did their part, the growing pyramid would return enormous amounts. Like any pyramid scheme, eventually it collapses as it runs out of people at the bottom to feed money to people at the top.

Current meme stocks are often companies with weak financials who are singled out by social media users who promote the stock in a viral online fashion. This leads to wild price swings both up and down almost without any regard as to what the company is actually worth.

The activity can actually benefit a company as with a current meme stock, AMC theaters,* who issued hundreds of millions of dollars in new shares to take advantage of the rising prices. Strangely, in the offering announcement they included the following: “We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business … we caution you against investing in our class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” In my career I cannot remember a company issuing new shares, and then discouraging potential investors from buying them.

Stocks whose price is based on social promotion rather than real value might turn out like an old chain letter. Eventually you run out of new people to collect money from. Some of these companies may become profitable one day given the easier access to capital that the higher stock prices offer, but for most of them, getting to a level of profitability that has any resemblance to current high valuations is going to be difficult.

Hype can push a stock price up, but it takes results to keep it there. Cute memes aside, a company that is selling for hundreds of times more than it is worth is not something I would recommend to most investors. But then again, I always tore up those chain letters.