Meme stocks are in the spotlight this week. GameStop, and others like AMC, experienced much volatility this week , rallying then tumbling after just two days. These so-called meme stocks, which gained popularity through social media platforms like Reddit and X (formerly known as Twitter), have attracted retail investors looking to make a quick profit. The ” meme stock ” frenzy that surfaced between 2020 and 2021 involved investors taking aim at short sellers and hedge funds who were pessimistic about GameStop and other companies, forcing them to cover their short positions and drive up the price of the target stocks. Future of meme stocks One analyst, who has previously been bearish on GameStop and tech stocks, said that while fundamentals for the stock have improved, GameStop is still in the “danger zone.” David Trainer, CEO of investment research firm New Constructs, said GameStop was previously in what he called his “zombie stock” list. He defined such stocks as likely to go to $0 as they “lack the cash to sustain their cash burn for very long and are likely to go bankrupt or have to raise new capital that meaningfully dilute shareholders.” “[We] highlighted GameStop’s soaring meme-sock driven valuation, lack of profitability relative to peers, and increasing [free cash flow] burn,” he told CNBC Pro this week. Since then, the company has raised more than $1 billion through a share offering in 2022, Trainer noted. “The offering more than doubled its cash on hand, which, along with positive FCF in the TTM period, greatly increases its cash-burn runway to over 69 months (based on 2-year average FCF burn),” he said. “Accordingly, GameStop no longer qualifies as a Zombie Stock,” he said. But Trainer cautioned that GameStop is still in his “danger zone” stock list. He defines such stocks as likely to see big decreases in share price — without going to $0 — because their valuations are “unreasonably high,” relative to their “very poor” cash flows and profits. ‘Danger zone’ stocks Here are some other stocks Trainer says is in his “danger zone” list, which also includes his “zombie stocks.” They are: AMC Entertainment Holdings, DoorDash , Robinhood , Tilray Brands and Beyond Meat . Trainer believes AMC “isn’t even worth” $1 per share, as it’s “nowhere near what the stock valuation implies.” The stock closed at $5.48 on Wednesday. Though its free cash flow was positive in 2023, that was the result of the harvesting of its assets rather than improving profits, he pointed out. Trainer said the topline results from DoorDash’s first-quarter earnings report may “look positive on the surface,” but they “mask the ongoing unprofitable nature” of its business. He cited its “continuing deterioration” of its fundamentals, including its “unsustainable” expenses and steady cash burn. As for Robinhood, he said that from 2020 to 2022, the company burned through $7.8 billion in free cash flow, excluding acquisitions. “Raising additional capital to fund this cash-burning business would likely come at a high cost, especially as the crypto market cools and Robinhood’s growth slows,” said Trainer. “Robinhood’s once hyper-growth has slowed significantly, which makes its cash burning operations look even more alarming.” Trainer said Beyond Meat’s shares could fall further based on declining revenue also on “unsustainable cash burn”; competitive disadvantages in a crowded industry; and the “unrealistic expectation” that it can improve profitability while more than doubling its market share. — CNBC’s Yun Li contributed to this report.
