Meme stocks were quite popular among retail investors during the COVID-19 pandemic. Typically, “meme stocks” gain popularity on social media platforms, such as Reddit (RDDT), resulting in a buying frenzy among retail investors and a strong uptick in share prices.
While it's possible to generate enviable returns in the near term, investing in meme stocks is quite risky, given that they are typically backed by investor sentiment and not by company fundamentals. For instance, one of the most popular meme stocks in 2021 was AMC Entertainment (AMC), whose share price surged more than 2,500% during the first half of 2021. Today, the stock trades at $3 - and that's after a 1-for-10 reverse split carried out last fall.
Here are three meme stocks investors should avoid this April.
1. GameStop Stock
The original meme stock darling among retail investors, GameStop (GME), is down 34% in 2024 due to disappointing quarterly results. In fiscal 2024 (which ended in January), GameStop reported revenue of $1.79 billion and earnings of $0.22 per share. Comparatively, analysts forecast revenue at $2.05 billion and earnings of $0.30 per share.
GameStop explained that hardware and accessories sales declined by 12% year-over-year to $1.09 billion in fiscal Q4, while the corresponding pullback in software sales was even steeper, at 31%. In recent years, GameStop has been struggling with falling sales due to the worldwide shift towards digital game downloads and slowing sales of physical console games.
That steep fall in high-margin software sales resulted in lower-than-expected earnings for GameStop. Moreover, the gaming retailer did not offer any guidance for fiscal 2025, making investors nervous.
With just one analyst left in coverage, GME is rated at “strong sell,” with a price target about 50% below Wednesday's close.
2. Reddit Stock
Reddit (RDDT) was the first social media company to go public since Pinterest’s (PINS) initial public offering (IPO) in 2019. Soon after Reddit listed on the NYSE, shares surged almost 100% over the next two days. Today, RDDT stock trades down 15% from all-time highs, valuing the company at a market cap of $7.5 billion.
The social media site was founded in 2005, and it reported revenue of $804 million in 2023, up from $666.7 million in 2022. Similar to other social media platforms, Reddit earns a significant portion of its revenue from digital ads. While Reddit enjoys high gross margins, it remains unprofitable, reporting a net loss of $90.8 million in 2023 - narrower than its prior-year losses of $158.6 million.
Reddit ended 2023 with more than 100,000 communities and 73 million daily active users, indicating an average revenue per user of $5.51. Yes, Reddit might seem like a compelling investment choice, but I would wait for the company to report consistent profits before investing.
3. Trump Media
Another brand-new meme stock from the social media space is Trump Media (DJT), which recently went public via SPAC merger Similar to Reddit, Trump Media surged 59% on its first day of trading before pulling back to close the session with a 16% gain.
Trump Media's best-known property is the social media application called Truth Social, though the numbers suggest that brand recognition for the app likely far outweighs the niche audience it serves. According to a report from Similarweb (SMWB), a website analytics company, the Truth Social platform attracted 5 million visitors in February, much lower than the 2 billion visitors for Reddit and over 15 billion for Facebook.
Valued at $1.8 billion by market cap, Trump Media reported revenue of $4.1 million and losses of $58.2 million in 2023. Further, a majority of its losses were driven by interest expenses. Valued at an eye-watering 500x trailing sales, Trump Media stock should not be touched with a 10-foot pole.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
