Meme stocks are rising before the opening bell Wednesday after GameStop, one of the most heavily traded off-brand stocks during the pandemic, posted a surprise profit for the fourth quarter.
Rather than a per-share loss of 16 cents as Wall Street had expected, the video game retailer reported a profit of 16 cents per share, or $48.2 million in all.
GameStop's revenue fell and much of the profit gain came from aggressive cost cutting, including store closures and layoffs. However, as was the case during the pandemic, fundamentals that typically drive stock movement appear to be being pushed aside.
Shares of GameStop Corp., Grapevine, Texas, surged 47% in premarket trading and it pulled other meme stocks along for the ride.
During the pandemic, GameStop was a member of a group of beat-down stocks that drew smaller investors in huge numbers. The theory was that if enough small investors got in the game and drove the stock higher, it would force large hedge funds with short positions (bets that the stock would fall), to capitulate and sell those positions at a massive loss.
It worked. GameStop’s stock ran from 65 cents in April 2020, near the start of the pandemic, to more than $120 by January 2021. Similar tactics drove the stock of struggling movie chain AMC 15 times higher during the same period, and that dynamic appears to be driving the stocks of GameStop, AMC, and other so-called meme stocks in early trading Wednesday.
Citron Research, Melvin Capital and other big hedge funds lost an estimated $5 billion on the other side of the trade in 2021, according to analytics firm S3 Partners last week.
Shares of AMC Entertainment Holdings Inc. jumped 9%. Bed Bath & Beyond Inc.’s stock climbed more than 11% and Virgin Galactic Holdings Inc. rose more than 3%. Palantir and Nokia, also considered meme stocks, rose as well.
GameStop CEO Matthew Furlong said during a post-earnings conference call late Tuesday that inflation, rising interest rates and material macro headwinds forced cost cuts, and those efforts will continue this year.
"We’re going to aggressively pursue further cost containment, efficiency, profitability and pragmatic growth in the categories where we can consistently delight our customers, Furlong said.
Shares of GameStop are down 4% this year.