As I write this article, the S&P 500 is trading at its 52-week high.
Despite concerns about weak earnings, the likelihood of another interest rate hike, and a possible recession at some point in the next six to nine months, investors continue to climb the wall of worry. But should meme stocks be along for that climb?
Like many questions facing investors, the answer to that question is likely to be, it depends. Meme stocks are simply stocks that are generating significant attention on social media. Using that definition, many of the “Magnificent 7” stocks are meme stocks. And those stocks will have you laughing all the way to the bank.
But other meme stocks are no laughing matter. These stocks attract investors with low stock prices. However, that low stock price usually comes with an elevated valuation. And as I’ll bring out in this article, there are companies that don’t offer value to investors. In fact, one of these companies has already filed for bankruptcy.
So while investing in these meme stocks may seem attractive to traders who are only interested in microscopic price movements, investors should avoid a long position in any of these troubled stocks.
Upstart Holdings (UPST)
Upstart Holdings (NASDAQ:UPST) is taking investors on quite a ride. UPST stock is up 109% over the last 12 months. But while many times investors should look at stocks with a long lens, in this case, you would be well served to narrow your focus.
When you do, you’ll see that Upstart stock is up 340% since hitting a low in May around $12.21. And to be completely fair, the company did beat on both the top and bottom lines in its May earnings report.
However, that doesn’t explain a 340% rise in the stock. Not when both numbers were down sharply on a quarterly and a year-over-year basis. Also, the company’s guidance points toward a continuation of this trend at least into the coming quarter.
Instead, this is an AI-fueled rally. The company operates a cloud-based AI lending platform. Investors have been driving up the valuation of any company with an AI thesis.
So what’s the problem? Upstart is losing revenue as interest rates rise. The benefit to using AI is to gain a comprehensive view of potential borrowers rather than reliance upon traditional metrics. This was an advantage when interest rates were low. But as interest rates rise, that advantage is not as clear.
Analysts have a negative view of the company’s stock. Out of 15 analysts that have offered ratings in the last three months, 10 have given UPST stock a “Sell” or “Strong Sell” rating. In addition, the consensus price target shows a decline of over 65%.
Lordstown Motors (RIDE)
Lordstown Motors (NASDAQ:RIDE) stock is up 39% in the week ending July 18. But that shouldn’t be a reason for investors to start piling into RIDE stock. The EV startup entered the market with much promise. But right now, it’s hard to see an investment in Lordstown paying off for investors.
To begin with, the company issued a 1-for-25 reverse stock split. With current market conditions, that by itself isn’t a death sentence. A reverse stock split is a common tactic used by companies whose stock is in danger of being delisted.
But after conducting the reverse stock split, Lordstown filed for bankruptcy in late June. The company has some intriguing assets such as its namesake production facility in Lordstown, Ohio. Plus, the company did manage to manufacture its Endurance truck. The company’s CEO, Edward Hightower, believes these and other assets could be valuable to other EV companies.
But for RIDE stock investors, it’s time to move on from this troubled stock.
The last pick on this list of meme stocks to avoid is fuboTV (NYSE:FUBO). I do admit to being caught up in the hype of FUBO stock at one time. The company is a live TV streaming platform similar to Alphabet (NASDAQ:GOOGL) and its YouTube TV.
However, fuboTV’s unique selling proposition was its live, sports-forward platform. When the company first went public in 2018 it was hoping to capture an audience as the World Cup kicked off.
The company was also attempting to leverage its focus on live sports with an interactive sports book. The idea was that it would have a captive audience who could subscribe to the platform and use it for sports betting. That would have gone a long way towards helping the company pay for the licensing rights to show live sports.
It was an intriguing thesis. But the company has since walked away from (or at least paused) plans for the sports book. That leaves a platform contending for viewers.
To be fair, FUBO continues to increase its top line on a sequential basis. However, the growth is slow and inadequate for the company to turn a profit. And with no profit seen through 2024, it’s time for investors to change the channel on FUBO stock.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.