With Redditors in the driver’s seat, meme stocks will dominate market news this year
The Great Meme Stock Bubble of 2021
The dust hasn’t even settled yet on the “Great Meme Stock Bubble of 2021” and people are already selling the rights to the movies. By the time these stories hit the silver screen, though, where will meme stocks have gone?
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To answer that, these are my five meme stock predictions for the new year, with topics ranging from cannabis picks to cryptocurrencies.
Meme stocks can be hard to time. But one thing is clear, they will dominate the stock market news for the foreseeable future. So, here’s where the latest batch could go.
Marijuana Stocks Will Soar… Until Congress Drops the Ball
This year has seen no shortage of hot marijuana stocks looking to make their mark. More specifically, the top-five cannabis stocks mentioned on Reddit’s subreddit, r/WallStreetBets (WSB)– Tilray (NASDAQ:TLRY), Sundial Growers (NASDAQ:SNDL), Aphria (NASDAQ:APHA), Canopy Growth (NASDAQ:CGC) and Aurora Cannabis (NYSE:ACB) — have returned as high as 360% this year.
All this excitement, however, hinges on one hope: U.S. federal cannabis legalization. It’s a ball that Senate majority leader Chuck Schumer got rolling this month, after declaring intentions to end federal marijuana prohibitions by this year. If the $78 billion U.S. marijuana market opens to Canadian companies, these firms could stand to become America’s next Big Tobacco.
But this optimism is likely premature. For instance, as FiveThirtyEight senior writer Amelia Thomson-DeVeaux points out, Congressional appetite for total legalization remains low. In fact, the most investors should expect by 2024 are “piecemeal marijuana reform bills” that decriminalize cannabis.
That would leave Canadian pot companies locked out of the U.S. recreational market, sending share prices all the way back down.
GameStop Will Sink Below $20
Short squeezes can last a long time, but even the best trades have a sell-by date. So, although GameStop (NYSE:GME) stock could hold a $50 to $70 range for several more months, it’s unlikely Reddit users can repeat a big squeeze to $480.
Plus, as 2021 rolls on, even fewer people will believe GameStop is worth $50, or perhaps anything at all. The company already cut its dividend to zero before the novel coronavirus pandemic. And without a clear strategy to replace its lucrative used-game business, it is starting to look more like Blockbuster than Best Buy (NYSE:BBY).
But not all is lost. GameStop investors still have time to sell out at higher-than-usual valuations. As of this writing, GME stock’s 0.69 times price-to-sales ratio is still twice as high as its ten-year average. History also shows that the effects of short squeezes can last several years.
Just don’t wait too long. As GameStop struggles to replace its mall-based stores with e-commerce revenues, the company could easily see shares sink back to $20 by the end of the year.
AMC Entertainment Will Head Towards Bankruptcy
Even before Covid-19, AMC Entertainment (NYSE:AMC) was in trouble. Years of debt binging by its Chinese owners had left the once-profitable firm in financial ruin. By 2019, the company’s interest payments were twice as large as its operating income. In other words, the company can’t even afford the interest on its debt, let alone ever paying down the principal.
That’s left AMC in an endless cycle of interest payments — a term known as a “zombification.” And though the company managed to raise almost $1 billion during its Reddit-fueled rise, they still need some $4 billion more to reduce interest payments to a payable level.
As 2021 rolls forward, expect to see AMC’s majority owners start giving up hope. Few movie studios have created new content for the theaters recently and the 2021 blockbuster lineup is mostly made up of delayed releases from last year. Without a significant profit driver in 2021, AMC will likely fall to its far better-capitalized rival, Regal Cinemas, which is owned by Cineworld (OTCMKTS:CNNWF).
BlackBerry Stock Will Hold Steady
Contrary to my other predictions, not all meme stocks have a worrying future. After struggling for years, BlackBerry (NYSE:BB) has finally stemmed the tide. For a while, the tech company worked in the shadows, trying to replace its billions of handset sales with software products. And it wasn’t until the Reddit stock bubble that people started noticing.
Today, BlackBerry dominates the Internet of Things (IoT) and connected vehicle space. Investors can find the company’s QNX operating system embedded in 175 million cars. The company also has security solutions in 500 million IoT endpoints around the globe. And, as the cybersecurity perils of IoT devices increase, investors can expect BB to eventually replace its declining licensing revenues and regain growth.
Analysts now project BlackBerry’s revenues to stabilize by 2022 and see modest growth after that. Shares sit at just over $12 and investors can expect BB stock to hold steady or even show some modest gains by year-end.
Bitcoin Will Go Up, But Altcoins Will Steal the Show
However, in 2021, we could see a significant change. As more exchanges start offering altcoins, these alternatives could start challenging the dominance of BTC. On Feb. 8, the Chicago Mercantile Exchange launched Ether futures, making Ethereum (CCC:ETH-USD) the second cryptocurrency on the CME.
Bitcoin alternatives have also spread to retail investors. In October 2020, PayPal (NASDAQ:PYPL) started offering altcoins alongside Bitcoin. Additionally, on Robinhood, investors can now buy 16 different cryptocurrencies besides BTC.
Keep in mind that Bitcoin’s value could fall in 2021 if a significant economic shock hits. After all, cryptocurrencies are risk-on assets that positively correlate with the market. However, if markets continue to rise, both Bitcoin and altcoins could see more meaningful gains.
What to Expect in 2021
There’s still a great deal of uncertainty surrounding the markets this year.
For instance, novel coronavirus variants threaten the efficacy of vaccines. Plus, a shakier-than-expected recovery could send the stock market tumbling. But one thing is sure — social media is here to stay when it comes to investing. That means meme stocks will play an outsized role for years to come.
So, Wall Street should keep an eye on Reddit. That’s because, now more than ever, it’s going to be individuals that drive the market in 2021.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Article By Thomas Yeung, CFA, InvestorPlace Markets Analyst
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.