How Social Sentiments Impact Meme Stock Prices - a Study on GME Stock's Rapid Rise and Fall

As the anticipated GME earnings report approaches, investors and analysts are abuzz with speculation. Beyond traditional financial metrics, the role of social media sentiment has become a crucial factor in predicting stock price movements. This article explores the intricate relationship between GME earnings and the powerful influence of social media on stock prices, shedding light on the modern dynamics of market behavior.

How Social Sentiments Drive GameStop Stock Prices in 2021?

The Reddit revolution in the US has highlighted the immense power that retail investors can wield in stock markets when mobilized by social media. In 2020, amateur investors increasingly turned to retail platforms, driven partly by the pandemic keeping them at home and partly by the flood of information available on social media. This newfound engagement was facilitated by easy access to the market through retail brokerages and platforms like Robinhood. This is how GameStop's sky-high price surge occurred, then led to a new concept — Meme Stock.

To understand the gravity of the situation, consider this: on January 27, at the height of the GameStop saga, 24 billion shares were traded on US exchanges, surpassing the previous record by 4 billion shares set during the 2008 global financial crisis. The influence of social media on stock prices is striking. Further analysis reveals that both the opening and closing day stock price trends closely mirrored Google search trends.

Well-informed individuals looking to manipulate the market posted information on social media forums such as the Reddit chatroom r/wallstreetbets, which boasts 4.8 million members. They encouraged the masses to buy shares in the hope of driving certain stock prices up. The motives behind this ranged from personal profit to a desire to squeeze the short positions of hedge funds. This information spurred new investors to search on Google, and as more people joined, the price was pushed sky high. However, when the activity on social media slowed and discussions decreased, stock prices began to drop, following the trend of diminished online engagement. Obviously, discussions slowed as the stock market closed for the weekend. However, when the market reopened, Google search trends surged once again.

“Until now, retail trading activity has never been able to move the market one way or another. However, following the successful coordination by a large group of traders, the power dynamic has shifted; exposing the vulnerability of the market as well as the weaknesses in firms’ trading systems,” says Guy Warren, chief executive officer of FinTech ITRS Group.

Three Years Later: How Does Social Sentiment Impact GameStop Now?

In 2024, social sentiments have also played a significant role in driving the stock prices of GameStop (GME). Here are the key points that illustrate this influence:

Roaring Kitty's Posts: Keith Gill, known as "Roaring Kitty," made a series of cryptic posts on social media platform X in May 12, 2024. These posts, despite not mentioning specific company names, reignited interest in GameStop, leading to a significant surge in its stock price. For instance, GameStop's shares jumped 26% in Frankfurt after a 60% surge in New York following his posts.

Impact on Meme Stock Rally: The posts from Roaring Kitty were a catalyst for a brief revival of the meme stock trade, pushing GameStop's stock to a high of $64.83 per share on May 14, 2024, before it dropped sharply later in the week.

Retail Investor Activity

Despite net retail trader inflows being smaller compared to the 2021 frenzy, there was still notable participation from retail investors. Over the five trading days leading up to the recent surge, the average retail share of GME turnover was approximately 7%. Subreddits like r/GME and r/SuperStonk remained active, with thousands of members discussing and promoting GameStop. These communities maintained a steady buzz around the stock, contributing to periodic spikes in trading activity. On May 17, 2024, GameStop announced plans to sell additional securities, resulting in a premarket stock price decline of over 20%. This announcement, combined with preliminary results showing a decline in first-quarter sales, further influenced investor sentiment and stock performance.

Why the GME Stock Surge Failed to Last as Long 2024?

This time, the stock price surge lasted only three days compared to nine days during the 2021 frenzy, indicating that the excitement among retail investors may not be as intense as before. Additionally, Google search trends for GameStop were not as high as they were during the initial surge. The company's announcement of plans to sell additional securities, along with preliminary results showing a decline in first-quarter sales, accelerated the stock's decline, contributing to the overall reduced duration and intensity of the price increase.

Michael Pachter from Wedbush maintains a bearish outlook on GameStop, citing the company's ongoing financial struggles and lack of a clear growth strategy. Pachter has an underperform rating and a $5.60 price target for the stock. Despite these bearish analyst opinions, the stock continues to attract speculative trading, driven by social sentiment hype and retail investor enthusiasm. This dynamic creates a volatile trading environment where social sentiment can lead to rapid price movements.

How to Identify Social Trends in Stocks?

After analyzing the rise of GME stock, you might wonder how to identify social trends to catch the next meme stock and make significant profits. Here, we summarize insider tips and strategies to find the next big meme stock. Additionally, use an all-in-one stock research hub to catch fresh and hot news, join discussions with other investors, and access various AI-powered analyses.

Is Meme Stock a Good Buy in the Long-term?

While meme stocks can offer exciting short-term opportunities, they are generally not considered good long-term investments due to their high volatility, lack of strong fundamentals, and speculative nature. Investors should approach meme stocks with caution and consider more stable and diversified options for long-term financial growth.

Before investing in any meme stock, conduct thorough research on the company's business model and long-term growth prospects. Diversify your portfolio with ETFs or mutual funds to mitigate risk. Avoid letting the fear of missing out (FOMO) drive your investment decisions, and focus instead on long-term financial goals and stability.