In recent weeks, the financial markets have experienced a phenomenon echoing the memorable stock meme craze of 2021. Within a short period, stocks like Trump Media and Reddit have seen their values skyrocket and then dramatically drop, sparking debates about the potential return of meme mania.
Meme stocks refer to company stocks that gain viral traction due to elevated social sentiment, fueled primarily by activity on social media platforms such as Reddit, X, or Facebook. The best example of a meme stock has been GameStop, which soared in price between 2020 and 2021 from $0.96 to $120.75 due to a concerted effort by the online community r/wallstreetbets to induce a short squeeze. At the time, AMC Entertainment and Blackberry followed suit, showing how social media can significantly influence stock prices.
The new frenzy stirred the attention of market participants following the launch of Reddit's IPO. It became the year's most anticipated stock market debut, meeting expectations with a 48% rise on the first day. Right after that, Trump Media quickly captured the market's attention, soaring as much as 59% in its opening session.
However, following their remarkable rallies, both companies experienced significant downturns. Reddit's decline came after a corporate filing revealed that CEO Steve Hoffman had sold 500,000 shares, and COO Jennifer Wong disclosed the sale of 514,000 shares. Meanwhile, Trump Media's drop occurred after the company reported losses of $58 million in 2023. These events unfolded within days, leaving Trump Media trading 30% lower than the previous week, while Reddit's stock is down by 20%.
After all, Trump Media and Reddit have shown characteristics typical of meme stocks, capturing attention through viral social sentiment and speculation, often detached from their fundamental financial metrics. At the same time, we've observed how much of the initial momentum deflates, reflecting more realistic values. While the allure of meme stocks is undeniable, the volatility and risk they introduce cannot be overstated. Retail investors, drawn by the prospect of quick gains, must navigate these waters carefully. The history of meme stocks shows that while there are winners, the potential for significant losses is substantial.
