Five times Reddit traders influenced the stock market
19:58, 20 December 2021
Retail investors grew in prominence this year in part due to the conversations happening on Reddit communities and specifically r/WallStreetBets. And now Reddit itself could go public in a deal that is likely to be influenced by the traders communicating in its forums.
Reddit submitted a draft registration statement for an initial public offering last week but did not disclose the number of shares and price range for the proposed offer.
The platform was instrumental in turning investing into something that is accessible to the middle-class and not just investment firms and hedge funds. That shift started in 2019 when brokerage accounts lowered their fees to zero, and once the first “memestock” took off in early 2021 millions of people joined in the fun.
Charles Schwab in its latest earnings presentation reported new brokerage accounts grew by 110% year over year through the nine-month period ended 30 September 2021 as nearly 6 million people opened accounts. And r/WallStreetBets now has 11.3 million subscribers posting and searching for investing tips, up from around 5 million at the start of the year.
Here are five of the biggest investment crazes started by WallStreetBets in 2021.
It all started with GameStop. The video game retailer was trading below $5 per share for much of 2020 as most investors thought it was on its way to total collapse because the pandemic shuttered many physical retail locations, and competing online stores allowed gamers to download new games from home.
Then retail investors started taking an interest in January 2021 especially after new board members promised to shake things up and helped build the stock price to around $18 per share. Then suddenly the stock shot more than 2,300% higher to $483 per share in a matter of days. The stock has been up and down all of 2021 but remains some 800% higher year to date at around $155 per share.
One reason the stock shot “to the moon” is because this new cohort of retail investors saw optimism that GameStop could turn it around with a new emphasis on online sales including delivery and in-store pickup as well as more focus on PC gamers and investments in new technologies such as the blockchain.
Indeed, GameStop has implemented many of these changes and its revenue is up 26% year over year to $3.75bn for the 39-week period ended 30 October, according to the company’s latest earnings report released in December.
However, the more cynical read is that is that Redditors wanted to disrupt the Wall Street hedge funds that were heavily shorting the stock. Citron Research shut down its short-selling business after it was forced to close out its position in GameStop at a substantial loss and the elite hedge fund Melvin Capital was bailed out by two other firms after losing more than half its investments in the debacle.
What is your sentiment on AMC?
Reddit investors began targeting other shorted stocks and soon set their sights on the struggling movie theatre chain AMC.
Much of the company’s theatres remained closed amid the pandemic and more and more movie studios were moving to digital releases on streaming platforms to subvert the theatrical release altogether. And yet, in late May to early June, AMC’s stock shot up more than 500% higher to as high as $72.62 per share.
The company cashed in by issuing more than 100 million new shares at this new elevated price and sought to expand its charter and issued 25 million more before the plan was scrapped over the summer. Such a move typically dilutes a company’s share price but in this case retail investors largely stood pat with the stock trading at around $28 per share up more than 1,300% on the year.
Importantly, retail investors now hold more than 80% of the company’s shares and are commanding that power to decide the company’s direction. Retail investors are now included in earnings calls as AMC CEO Adam Aron is constantly implementing ideas catered to that audience in the form of free popcorn for shareholders, “I Own AMC” NFTs, and the ability to buy movie tickets using cryptocurrencies.
Rental company Hertz was in many ways the precursor to the meme-stock frenzy.
In the Summer of 2020 the car rental company filed for bankruptcy as it was unable to pay its debts. Yet, Reddit traders bought up the stock anyway even as the company’s own CEO declared the shares “worthless.”
The traders were largely proven right when in May 2021 Hertz accepted a $6bn bid from a group of investors to exit bankruptcy in a reorganisation package that included an unusual $1bn payout to shareholders at $7–$8 per share – more than any investor buying in the summer of 2020 would have originally paid.
Since returning to the Nasdaq in July, the stock rose to highs of $23.50 per share amid optimism for its plan to focus on electrification and rent a new fleet of Tesla EVs. However, the stock is slipping back to around $13 per share in December with Covid-19 cases rising and an increased threat of restricted travel.
Reddit investors give, but they also take away.
Robinhood was the trading app of choice for many on Reddit through the start of the pandemic for its easy-to-use interface and claims of no-fee trading.
However, meme stock investors quickly turned on the platform when SEC and the stock exchanges ordered Robinhood to halt trading on 50 different companies amid a frenzy of activity that was causing volatility in the market.
Then the complaints started to come in that traders on the platform were not receiving the best compensation possible for their orders and that rather Robinhood was trading with the Wall Street firms that would pay it the largest fees. Those complaints resulted in an SEC investigation that Robinhood settled for $65m just last week.
In June, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $70m – the largest fine ever levied against a company – for displaying false and misleading information to customers.
Robinhood priced its initial public offering at $38 per share in July but have since fallen to below $18 per share through December as it continues to miss earnings expectations.
Investors on Reddit are certainly not right about every stock, and certainly, some have been big losers on the year.
Robinhood is one of the most high-profile companies to trade down this year but so too is Bed Bath and Beyond, which peaked at $53.90 per share this year but in October fell as low as $13.38 per share.
Others include ContextLogic with its shopping app Wish, women's sexual and reproductive healthcare company Evofem Biosciences, and dermatology company Vyne Therapeutics, which are all down by more than 80% year to date.
Then there are those such as cancer treatment company ZIOPHARM Oncology, specialty pharmaceutical company AcelRx Pharmaceuticals and video game competition platform Skillz that are all down by 50% or more on the year.