Investors have been warned to be wary of ‘the extreme risk’ of piling into meme stocks after a White House post on X sent GameStop shares soaring 7% on Monday.
A flurry of memes depicting US President Donald Trump as a character in Xbox game Halo, captioned with GameStop’s slogan ‘Power to the Players’, triggered a social media frenzy over the weekend.
As a result, the American games and electronics retailer saw its share price spike when the New York Stock Exchange opened on Monday morning, surging from $23.30 to $40 before falling back to $23.53 when trading closed.
What happened with GameStop and Trump?
On Saturday GameStop jokingly declared that Xbox and PlayStation’s ‘console wars’ were over in a tongue-in-cheek post on X.
It was in response to a Microsoft announcement that its Xbox Halo franchise will be available on rival Sony’s PlayStation 5 next year for the first time ever.
The Halo games first launched in 2001 with Halo: Combat Evolved coming to market as an Xbox-exclusive.
A quarter of a century later, and Microsoft is finally set to share the rights with its biggest competitor, PlayStation owner Sony, marking an end to the standoff.
The White House shared GameStop’s response on Sunday, along with what appeared to be an AI-generated image of Donald Trump saluting the US flag while dressed as the Master Chief, Halo’s hero.
The White House’s “Rapid Response” X account also responded to GameStop with a post: “NUMBER 9: President Trump presides over the end of the 20-year Console Wars.”
Social media exploded, with thousands of memes appearing within hours. GameStop responded with a meme of Trump and Vice President JD Vance in the Halo game world.
It sent GameStop’s share price soaring on Monday morning.
The problem with meme stocks
A growing number of companies, referred to as meme stocks, have seen their share prices rocket overnight as investors rush to buy on the back of speculation on social media.
But the rapid price rises are often followed by an equally rapid slump – leaving investors seriously out of pocket.
Lee Wild, head of equity strategy at interactive investor, said: ‘While trading meme stocks can potentially generate big profits, timing entry and exit points requires a lot of luck.
‘Get it wrong and you can end up nursing significant losses. Investors need to be aware of the extreme risk when buying volatile stocks like this.’
Last week Beyond Meat and Krispy Kreme saw similar share price surges off the back of social media memes. Both companies were heavily shorted by hedge funds gambling on the stocks’ value falling.
After retail investors piled in, pushing prices up overnight, hedge funds were forced to buy shares in bulk to cover their losses, inflating prices even further.
On 21 October, the US-listed Krispy Kreme saw its share price climb from $3.41 to $4.86 within 24 hours, despite reporting second quarter losses of -0.150 per share in August.
UK-listed Beyond Meat saw its share price peak at £7.50 a share on 22 October before dropping back to around £1.68 on 28 October.
Russ Mould, investment director at AJ Bell, said: ‘A lot of these meme stocks are struggling to make a profit or generate cash and after the initial pile-on…it is hard to justify some of their price tags.
‘That may be why these names have, in the past, found it hard to hang on to the share price gains once the initial frenzy fades.’
‘Appetite for risk is high’
GameStop’s recent surge is not its first triggered by a social media frenzy.
In January 2021, posts on Reddit thread r/wallstreetbets sent its share price rocketing as investors swarmed to get hold of the stock.
It also left a number of hedge funds racing to cover their losses, with the stock price going over $120 per share at its height. Within a month it had fallen back to around $80 a share.
Mould said: ‘The last meme stock surge did not last long and, it could be argued, presaged 2021 to 2022’s nasty correction in risk assets.
‘Confidence is high, appetite for risk is high and it’s a bull market, so it is no surprise to see episodes such as this, especially when investors are growing in confidence that central banks have their back, in the form of interest rate cuts.
‘Equally, sceptics will argue that such frothiness is a bad sign, especially as use of margin debt is high and the fundamental investment case for some of these companies requires a bit of imagination to see them returning to form.’
He added: ‘The risk remains that investors get caught out this time, too, especially if they are latecomers to the buying frenzy.’
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