Meme stocks have been gaining traction since the beginning of 2021, as retail investors leveraged the power of social media to boost the popularity of their favorite stocks to sky-high limits. Since then, popular social media platforms such as Reddit forum r/wallstreetbets have been the go-to websites for retail investors for identifying the best short-term investment opportunities.

However, the recent market pullback, driven by rising concerns surrounding the omicron COVID-19 variant has also caused meme stocks to take a hit. This is evident from VanEck Vectors Social Sentiment ETF’s (BUZZ) 1.8% decline over the past month. Meme stocks tend to be very risky investments and highly depend on investor sentiment rather than macroeconomic factors. As investors hedge their portfolios against a severe market pullback, meme stocks are expected to slump in the near term.

Popular meme stocks The Walt Disney Company (DIS), GameStop Corp. (GME), Peloton Interactive, Inc. (PTON), and ContextLogic Inc. (WISH) have been slumping over the past few months. Moreover, with infrequent mentions on wallstreetbets, these fundamentally weak stocks are best avoided now.

The Walt Disney Company (DIS)

DIS is one of the biggest media and entertainment companies in the world. It operates in two segments – Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products. However, the company has an ISS Governance QualityScore of 7, indicating relatively high governance risk.

DIS frequently appears on the popular Reddit forum r/wallstreetbets. Over the past seven days, there have been 27 comments on DIS. However, 51% of comments conveyed negative sentiment surrounding the stock.

For the 2021 fiscal year that ended on October 2, 2021, DIS’ revenues increased 3% year-over-year to $67.42 billion. However, the company’s total segment operating income fell 4% from the same period last year to $7.77 billion. Cash flow from operating activities came in at $5.57 billion, reflecting a 27% decline from the year-ago value. Free cash flow slumped 45% year-over-year to $1.99 billion.

Analysts expect DIS’ revenues and EPS to rise 28.6% and 99% year-over-year to $20.89 billion and $0.64 in the fiscal 2022 first quarter (ending December 2022). However, given the concerns surrounding the Omicron COVID-19 variant, the company’s fiscal first-quarter earnings might fall short of consensus estimates.

Shares of DIS fell 18.4% year-to-date to close yesterday’s trading session at $147.81.

It’s no surprise that DIS has an overall grade of D, which equates to Sell rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Quality, Value, and Sentiment. Of the 18 stocks in the F-rated Entertainment – Media Producers industry, DIS is ranked #13.

Beyond what we’ve stated above, you can view DIS ratings for Growth, Momentum, and Stability here.

GameStop Corp. (GME)

GME is a specialty retailer that sells video games and ancillary entertainment products in the United States, Australia, Canada, and Europe. It gained traction during the Reddit short-squeeze in January this year. GME has gained 972.2% year-to-date and 10.1% over the past month.

The GME short squeeze has benefited retail investors tremendously. This has resulted in a substantial rise in meme stock trading. Retail investors leverage social media platforms such as Reddit to hype up a stock, irrespective of its financials. More than 157 comments regarding GME have been made on Wallstreetbets over the past seven days. However, as retail investors are shifting towards other stocks to create a GME-like rally, 54% of the comments were negative, reflecting declining investor interest.

GME’s net sales increased 25.6% year-over-year to $1.18 billion in the fiscal 2022 second quarter that ended July 31, 2021. However, despite the improvement in sales, the company’s profit margins are in the red. Operating loss and net loss came in at $58 million and $61.60 million, respectively. Loss per share amounted to $0.85.

On November 4, GME entered into a new global asset-based revolving credit facility with a syndicate of banks to borrow $500 million. However, with negative operating cash flows and levered free cash flows, this borrowing is expected to create a debt and interest burden for the company, adversely impacting its financials.

The consensus revenue estimate of $2.03 billion indicates a 4.5% year-over-year decline in the fiscal 2022 fourth quarter (ending January 2022). Street expects the company’s EPS to decline 20.9% from the same period last year to $1.06 in the next quarter.

GME’s POWR Ratings reflect this bleak outlook. The stock has an overall grade of D, which translates to a Sell rating in our proprietary ratings system. In addition, GME has an F grade for Stability and Value. It is ranked #40 out of 44 stocks in the Specialty Retailers industry.

In addition to the grades I’ve highlighted, you can view GME ratings for Growth, Momentum, Sentiment, and Quality here.

Peloton Interactive, Inc. (PTON)

PTON sells interactive fitness products and services such as Bike, Treadmills, and streaming workout classes internationally. The company gained prominence during the initial stages of the pandemic, as people joined live-streaming classes to work out due to quarantine requirements and the closure of gyms. However, PTON has an ISS Governance QualityScore of 10, indicating high governance risk.

Shares of PTON declined 71.6% year-to-date and 57.5% over the past three months to close yesterday’s trading session at $44.39. This reflects diminishing retail investor interest in the stock. Of the comments on wallstreetbets over the past seven days, only 28 mentioned PTON. Furthermore, 40% of the 28 comments about PTON were negative.

PTON’s revenues increased 6.2% year-over-year to $805.20 million in the fiscal 2022 first quarter that ended September 30, 2021. However, the company’s total operating expenses increased 139.6% from the same period last year to $622.40 million. Operating loss came in at $359.70 million, indicating a substantial decline from the positive value reported in the prior-year quarter. Net loss amounted to $376 million. Loss per share came in at $1.25, missing the consensus estimate by 16.8%.

Several securities fraud class action lawsuits have been filed against PTON, alleging that the company had issued materially false and/or misleading statements. Also, the lawsuits allege that PTON falsely assured investors that the company’s growth trajectory would continue after the pandemic and has made misleading statements about its inventory levels.

Analysts expect PTON’s EPS to remain negative until at least 2023.

PTON has an overall grade of F, which equates to a Strong Sell rating in our POWR Ratings system. Also, the stock has an F grade for Growth, Stability, Sentiment, and Quality. Of the 70 stocks in the D-rated Consumer Goods industry, PTON is ranked #69.

In total, we rate PTON on eight different levels. Click here to view PTON grades for Value and Momentum.

ContextLogic Inc. (WISH)

WISH is one of the world’s largest mobile e-commerce platforms operating primarily in the Americas and Europe. It also provides logistics services to merchants to ensure smooth and timely delivery of products to customers. The company made its stock market debut through an initial public offering on December 16, 2020, raising $300 million in gross proceeds. However, the stock declined 80.3% since then to close yesterday’s trading session at $3.96.

For the fiscal third quarter that ended September 30, 2021, WISH’s revenues declined 39% year-over-year to $368 million. This can be attributed to a 55% decline in Core Marketplace segment revenue and a 24% decline in ProductBoost segment revenue. Adjusted EBITDA loss and net loss came in at $30 million and $64 million, respectively. Loss per share amounted to $0.10.

Lifshitz Law Firm, P.C. filed a class action complaint against WISH, alleging that it made materially false and misleading statements in its IPO Registration Statement and Prospectus in August 2021. According to the complaint, WISH also overstated its then-present monthly average users (MAUs) and MAU growth trends. In the same month, shareholder rights law firm Robbins LLP announced that it is investigating whether the company’s officers and directors violated the Securities Act of 1933, Securities Exchange Act of 1934, or breached their fiduciary duties.

Retail investors have been exiting their position on the stock, as evident from its poor price performance year-to-date. Of the 222 comments on wallstreetbets mentioning WISH, 57% have been negative.

Street expects WISH’s revenues to decline 60% year-over-year to $317.63 million in the fiscal fourth quarter that ended December 2021. Moreover, the company’s EPS is expected to remain negative until at least next year. WISH missed Street EPS estimates in three out of trailing four quarters.

WISH has an overall grade of D, which translates to a Sell rating in our proprietary ratings system. The stock has a Stability grade of D and a Quality grade of C. In addition, it is ranked #56 out of 77 stocks in the F-rated Internet industry.

We have also rated WISH for Growth, Momentum, Sentiment, and Value. Get all of WISH ratings here.

DIS shares were trading at $144.89 per share on Tuesday afternoon, down $2.92 (-1.98%). Year-to-date, DIS has declined -20.03%, versus a 23.29% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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