Meme stocks are the epitome of the unpredictable chaos that spilled over into so many areas of life against the backdrop of the COVID crisis. Wall Street was shaken up by a subreddit, WallStreetBets, with the community’s actions resulting in the GameStop short squeeze. This caused the stock to soar by over 15x and led to massive losses for hedge funds and short sellers.
To delve deeper into the origins of the social-media-driven stock market hype, we decided to explore the communities behind the meme stock phenomenon.
Graph 1. Google searches for “meme stocks” show that we are at the very beginning of the hype wave. People only started to look for meme stocks intensely in May 2021.
Power in Numbers
/wallstreetbets/ is one of the largest communities on Reddit, and in terms of monthly visitors (7.5 million monthly visitors based on Semrush Traffic Analytics), it outranks popular subreddits such as /r/NBA/ (7.2 million monthly visitors) and /r/league of legends/ (7.2 million visitors), falling short only of gamers’ community r/livestreamfail/.
It should be noted that Reddit is among the most visited sites on the internet, with its traffic exceeding 2.2 billion visits in June 2021, besting ebay.com (EBAY) but lagging behind yahoo.com. Given how many people visit these subreddits and make investment decisions based on discussions in the threads, these subforums have become a very influential tool to impact public opinion.
Graph 2. /r/wallstreetbets/ mostly attracts direct traffic, but the share of sources of search traffic is almost equal among Search and Direct. Many people started searching for this hyped community after the GameStop incident.
Can Website Traffic Indicate Imminent Price Fluctuations?
Traffic can be an indicator of upcoming stock price fluctuations. This graph showcases traffic to gamestop.com (GME), which peaked a couple of months before the GameStop short squeeze in November. To be clear, this doesn’t mean that traffic will always be a credible indicator of stock price changes, but tracking user behavior metrics might come in handy when analyzing company performance and deciding whether to buy or sell.
Graph 3. Gamestop.com traffic in 2020 and 2021. Traffic peaks in November and December, preceding a huge spike in the stock price in the end of January to the beginning of February.
Graph 4. Gamestop stock price over a year.
Identifying Countries Where Users are Most Interested
There are sites that explore the number of mentions of meme stocks to help monitor what Reddit users are talking about, namely memestocks.org and yolostocks.live. Interestingly, for https://yolostocks.live/, the majority of traffic comes from the U.S., but https://memestocks.org/ is more popular in Israel, with the U.S. ranking only second. These websites might be a good bellwether, but beware of investing in the companies that frequent these lists — odds are that their stocks are volatile and might not be the best fit for a more conservative investor.
Graph 5. https://yolostocks.live/ and https://memestocks.org/ geographic traffic by country distribution.
Analysts Weigh In
What do Wall Street analysts have to say? Ascendiant Capital Markets analyst Edward Woo commented, “Due to the popularity of GameStop on Reddit chat boards and with Robinhood retail investors, its shares no longer trade on traditional fundamental valuations or metrics, but on retail investors sentiment, hope, momentum, and the powers of crowds…This makes short-term price movement forecasts nearly impossible (and we acknowledge can drive shares much higher), but we believe that over the long run (over one year) GameStop’s current elevated share prices will come back down to match its current weak results and outlook.”
Turning to the rest of the Street, GameStop has a Moderate Sell consensus rating, based on 1 Buy, 2 Holds and 3 Sells assigned in the last three months. At $88.33, the average GameStop price target implies 42% downside potential.
Bottom Line
In order to make a more informed decision about whether to invest in a stock, a few steps are recommended. Explore public sentiment, monitor traffic to the company’s website, incorporate expert analysis, such as Wall Street analyst consensus, into your stock research, and identify countries where users are most interested in frequenting the company’s website.
