In the realm of meme stocks, alerting investors about the possibility of your company teetering on the brink of bankruptcy doesn’t carry the same negative connotation as it might elsewhere.
Stock prices of companies that have recently issued warnings of impending bankruptcy have experienced remarkable surges.
WeWork has become the most recent addition to the meme-status category, its stock price surging in defiance of unfavorable news.
In the peculiar realm of meme stocks, WeWork’s cautionary statement expressing “significant uncertainty” about its ability to sustain operations owing to substantial financial losses could position it as the upcoming focal point for investors.
Although it might appear contradictory, the strategy frequently adopted by meme stock enthusiasts involves driving up the stock prices of companies openly indicating their potential departure from the market. This pattern often results in erasing the entire equity value of the business.
WeWork provides the most recent illustration of this phenomenon. In the current week, its stock witnessed a remarkable surge of up to 162% subsequent to its alert to investors about its financial challenges. On Friday, the stock experienced a surge of as much as 49%, which was later curtailed by half to approximately 20%.
This trend is not isolated to WeWork alone. Another case in point is the trucking company Yellow, whose shares catapulted by an astonishing 800% after forewarning investors of an impending bankruptcy declaration earlier this month. Similarly, Tupperware’s stock witnessed an extraordinary ascent of over 800% over the past three weeks, despite the pronounced deterioration of its financial standing.
The meme-stock strategy of elevating the stock prices of struggling companies with strong brand recognition had its initial emergence in early 2021 with GameStop. A community of retail investors on Reddit united in their support of the beleaguered video-game retailer, propelling its stock price to astronomical heights. This trend subsequently extended to AMC Entertainment stock just a few months later.
This surge in meme-stock prices, primarily steered by retail traders favoring low-priced stocks, can wield significant influence over the underlying company. It offers them a novel avenue for fundraising through the sale of shares at inflated values.
This aspect carries significance since businesses in distress typically encounter limited options for raising capital, and resorting to equity sales often serves as a final recourse before resorting to the possibility of declaring bankruptcy.
WeWork’s trajectory has taken a steep downturn since its entry into the public market through a SPAC arrangement in 2021. The stock has undergone a precipitous decline of 98% from its original $10 SPAC deal price. This plunge has led to a stark devaluation from its zenith of $9 billion to approximately $500 million. This is a considerable shift, especially considering the company’s initial attempt to go public with an estimated valuation of nearly $50 billion.
The disruptive force behind this co-working office enterprise has yet to achieve profitability, accumulating losses of $16.4 billion since 2018, as indicated by data from YCharts. The persistent trend of remote work and the economic pressures on the commercial real estate sector have dealt blows to the company’s prospects. Moreover, the company’s frequent changes in leadership have added to its challenges.
While conventional investors might steer clear at the mere suggestion of impending financial troubles, the meme-stock community often gravitates towards such enterprises. Their aim is to provide a renewed lease of life, accompanied by the anticipation of substantial gains.
Nonetheless, the rapid ascent of these meme-stocks in response to limited positive news is mirrored by their potential for sudden crashes. It’s a scenario that potential buyers should approach with caution.