Interactive fitness equipment manufacturer Peloton (NASDAQ:PTON) has gained over 39 percent YTD, making it one of the biggest winners among resurgent meme stocks.
Despite its massive run-up in early 2023, Peloton is still weighed down by several problems. First and foremost is the company’s net margin, which stands at -84 percent. Return on equity is even worse at -117 percent.
Although Peloton’s losses are expected to soften this year, the company is still projected to lose $1.32 per share. This rate of loss hardly seems to justify Peloton’s jump in price, especially when revenue for the most recent quarter fell 23 percent year-over-year.
Peloton is also heavily burdened with debt. The company’s current debt-to-equity ratio is 6.48, far in excess of what most investors would consider a safe threshold. Unless Peloton can reduce its debt load and avoid further debt financing, the company will likely see its growth hampered by interest obligations in the long run.
Peloton’s management is implementing a turnaround plan that is intended to improve the company’s financial standing, but it’s far too early for investors to assume that this plan will ultimately bring the company to sustainable profitability.
Easily the most famous holding of the meme stock craze, video game retailer GameStop (NYSE:GME) has shot up by nearly 16 percent in the early weeks of 2023. While professional analysts project a target price of just $5 for the stock, it currently trades at over $21 per share.
Under normal circumstances, an improvement in share prices would probably be expected for GameStop. The company is expected to see a loss of just $0.75 per share over the next 12 months, compared to losing $1.34 in the trailing period. However, because of the stock’s already heavily inflated price, the rapid increase over the past few weeks appears to be unjustified.
Long-term, GameStop also appears to be in a poor position to grow in a market that is increasingly moving away from brick-and-mortar retail sales. Over the next five years, the company is expected to see its losses extend significantly. With little hope of long-term growth and no clear road back to profitability, GameStop still seems to be a low-quality stock held up almost exclusively by investor optimism.
Movie theater operator AMC Entertainment (NYSE:AMC) was another of the stocks that soared to prominence among retail investors shortly after GameStop.
Although it once traded for over $55 per share, the stock currently sits at just $5.33. AMC has climbed more than 31 percent YTD, despite an abysmal forecast from analysts. Analysts’ target price stands at just $2 per share.
In addition to incredibly bearish analyst sentiment, AMC is expected to continue losing money at a fairly rapid rate in 2023. The company’s net income over the past 12 months represented a loss of nearly $1.3 billion. Rumors have also circulated recently that AMC may be facing bankruptcy, something that would be far from unusual for a company suffering such deep losses.
Even if the struggling theater chain survives, its clear that this stock is not rising on the basis of the company’s fundamentals. Q3 saw revenues increase, but the company also extended its net losses considerably. Without a shift back to profitability, it seems unreasonable for AMC to rise by more than 30 percent.
Are Meme Stocks Back in 2023?
Although far from the explosive runs these companies saw early in 2021, it’s clear that retail investors are still bidding up the prices of once-popular meme stocks. If the meme stock rally holds up, it could once again have negative implications for the broader market.
Overly risk-tolerant investors pouring money into securities without regard for their underlying fundamentals adds volatility to the market as a whole. These traders are also likely to lose money due to not understanding the fundamental valuation of stocks as pieces of companies.
It should be noted, however, that this run-up may not have the steam of the original meme stock frenzy. Investors who bought into these companies at the height of their original runs incurred massive losses. Many of those investors will likely be unwilling to pour large amounts of capital into momentum trading again.
As of now, the meme stock rebound is concerning, but far from a crisis. Investors should, however, keep an eye on this situation to see how further developments may affect their portfolios.
Retail trading activity can disrupt markets, especially when inexperienced buyers bid up the prices of stocks well beyond their intrinsic values. Fortunately, the meme stock rebound of 2023 appears to be confined to a handful of stocks that have already seen this kind of volatility in the past.
Investors trying to navigate today’s uncertain market are likely best off continuing to look for oversold value stocks. Those who are less certain about value investing can also use more conservative approaches, including buying broad index funds.
While there are opportunities out there for investors willing to put in their due diligence, it’s clear that the meme stocks are just as shaky today as they were in 2020 and 2021. Those looking to earn reliable returns through sound, time-tested investment practices will almost certainly do best to avoid these overhyped and significantly overvalued securities.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.See The #1 Stock Now >>
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.