How to turn Reddit hype into real dollars, as meme-stock mania returns to markets

Business Insider

7 days ago

Can being a meme stock actually help a company, or is it just good vibes?
Four years after retail investors coordinated on Reddit's Wall Street Bets forum to save GameStop from short sellers, they've been piling into shares of Opendoor, Kohl's, Wendy's, American Eagle Outfitters, and other embattled companies in recent days.
Good vibes and social-media buzz might seem like hot air, but two senior investors told Business Insider how savvy managers can turn the attention into cold, hard cash.
Cashing in
Opendoor has gained 239% in the past month, while Kohl's and GoPro have jumped 58% and 127% in the past three months without traditional catalysts like bullish outlooks or strong earnings.
Stock gains of that scale can be transformative. GameStop has sold shares to capitalize on its elevated price, boosting its cash pile and magnifying the benefits of higher interest rates.
But its brick-and-mortar business, which is what originally attracted short sellers, remains under pressure. The video-games retailer's net sales plunged 27% to $3.8 billion last fiscal year as it shut nearly a quarter of its roughly 4,200 stores.
However, an increase in net interest income from $50 million to $163 million meant the company earned $131 million in net income, up from only $7 million in fiscal 2023.
Capitalizing can pay off, but it carries risks
Mark Malek, Siebert Financial's chief investor, told BI that companies can be wary of issuing stock as it dilutes not just the ownership and voting power of existing shareholders, but also the company's earnings per share, which can raise a stock's price-to-earnings ratio.
"A higher P/E can make a stock appear expensive, potentially deterring new investors — or worse, attracting short sellers," Malek said.
But when a company becomes a meme stock, a higher P/E ratio might not deter buyers, Malek said. "For a corporate treasurer, this is a dream scenario," he said, adding that "issuing stock into that kind of froth can fund operations, pay down liabilities, or shore up balance sheets."
While meme-driven gains are often temporary, "selling into strength isn't just smart, it's prudent," Malek said.
A financial lifeline
Meme-stock status can provide a "financial lifeline" for older or troubled companies as it's a "rare arbitrage window between market perception and operational reality," Naeem Aslam, chief investor at Zaye Capital Limited, told BI.
Aslam said that companies can use their trendy shares as an overvalued currency to raise cheap capital, but whether that pays off depends on how management spends and invests the fresh cash.
Bosses can use the proceeds to not only cover costs and pay off debts, but also fund technology investments and restructuring initiatives that can help revitalize their operations, he said.
However, Aslam added that, without a viable turnaround plan, issuing shares can alienate core investors and contribute to the market perceiving the stock as a speculative play.
Not every meme stock has been able to ride the Reddit wave to greener pastures.
"Firms like Tupperware and BlackBerry saw brief meme-fueled rallies but failed to translate them into lasting recovery due to structural headwinds," Aslam said.