Stock Market

Meme-stock groups have raised $5bn in 2 years since trading frenzy

Companies at the centre of the meme-stock mania that began two years ago have raised a collective $4.7bn from the hype, according to calculations by the Financial Times, even as the windfall has done little to boost their performance.

The eight stocks have also gained a combined $7.5bn in market capitalisation since the retail trading frenzy at the start of 2021. On January 28 of that year the popular US broker Robinhood outraged customers by limiting their ability to buy those companies’ shares, causing their prices to suddenly plunge.

The small investors who helped send a series of mostly consumer names rocketing 10-fold or more in mere weeks began with the aim of crushing hedge funds betting on the companies’ collapse, as well as bolstering once-beloved brands such as video games retailer GameStop.

Another consequence of the share rally was to allow companies including cinema operator AMC Entertainment and GameStop to raise new capital, highlighting how markets that are supposed to reflect corporate fundamentals can sometimes change them instead.

“Some bubbles do not really translate themselves into the real economy, but some bubbles do,” said Itay Goldstein, professor of finance at the University of Pennsylvania’s Wharton business school, who now cites meme stocks in his lectures on the real-world effects of trading frenzies.

The alacrity with which some companies used inflated stock prices to improve their finances “is the mechanism through which a trading frenzy can become self-fulfilling”, he added. The lesson for companies was to “grab this opportunity and issue more equity”.

Since its shares soared almost 20-fold in January 2021, AMC has raised $2.8bn from sales of equity, new debt and luring big new investors, according to FT calculations. Last month it proposed to further rejig its capital structure.

AMC has talked up the potential for recovery following the coronavirus pandemic, but rivals have struggled. Cineworld, the world’s second-largest cinema chain, filed for bankruptcy protection in September and pointedly lamented its bad luck in not getting the same meme-stock benefit as its rival.

GameStop has raised $1.8bn in the past two years. By contrast, Bed Bath & Beyond — another retail investor darling — has warned of possible bankruptcy and on Thursday disclosed receiving a notice of default from the bank JPMorgan Chase. The home goods chain was far slower to tap shareholders, only raising new equity late in 2022 after it bought back $400mn of its shares in 2021 in a bid to show confidence in a turnround plan.

“The big difference between the meme frenzy of AMC and the meme frenzy of Bed Bath & Beyond is the underlying market timing and conditions are quite different,” said James Gellert, chief executive of RapidRatings, a data analytics company that tracks companies’ financial health.

“When AMC and GameStop were at their height and when AMC issued more equity, we were in a bull market with a tremendous amount of liquidity,” Gellert said: “Today we are in a high-volatility environment in the closing hours of a credit cycle with reduced liquidity.” 

AMC boss Adam Aron put it more bluntly this month when discussing the collapse of US cinema rival Regal, part of Cineworld: “If you question why AMC keeps on raising so much cash: In tough times companies who don’t, just die,” he wrote on Twitter.

However, the gap between fundraising and performance suggests painful lessons may still lie ahead for meme-stock investors.

GameStop’s fresh funds have helped it transform net debts of $690mn in 2020 — more than twice its market capitalisation at that time — into a net cash pile worth $468mn as of October, according to S&P Capital IQ data. Yet it has not produced operating profits since early 2019 and since it shot to meme-stock fame, a 17 per cent rise in sales has been matched by a similar increase in costs, suggesting that positive returns on its new funds are still elusive.

“In an extended bull market period, companies can survive for a very long time as unprofitable entities, and as long as you can raise capital to burn you’re fine. But at some point the music stops,” said Gellert.

It was rational for companies caught up in “the meme mania” to seize the chance to raise capital at attractive rates, said Harry Mamaysky, a Columbia Business School finance professor. However, he added, “how much time they bought themselves” depended on how much equity they managed to raise compared with the amount of debt already on their books.

Alongside GameStop, AMC and Bed Bath & Beyond, Robinhood’s January 28 2021 buying ban included BlackBerry, Nokia, audio equipment maker Koss, retailer Express and lingerie seller Naked Brands Group, since taken over by Hong Kong-based electric-vehicle maker Cenntro Electric.

Naked Brands’ chair and chief executive, Australian Justin Davis-Rice, was second only to AMC’s Aron in quickly spotting the fundraising opportunity. After raising $50mn selling new shares in January 2021, Naked increased that to $183mn in total by July. During that time the company announced a “transformative” approach to its online unit and sold its lossmaking bricks-and-mortar for NZ$1 to Davis-Rice, who also assumed the business’s debts.

However, in November that year, Naked issued new shares to Cenntro to give the Hong Kong group 68 per cent control. One condition of Cenntro’s reverse takeover was that the new owners inherited at least $280mn cash and no more than $10mn of liabilities. They also sold the Frederick’s of Hollywood lingerie label to Davis-Rice for A$1 plus $12.6mn to cover its liabilities, while forgiving $9.5mn in intercompany loans.

Cenntro said it would deliver 20,000 vehicles in 2022. Unaudited first-half figures reported sales of 337 units. Its shares have fallen 90 per cent since the takeover.

Additional reporting by Madison Darbyshire

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