If you think investing in meme stocks is like playing a game of musical chairs, you might be surprised at how quickly the music might stop.
Nine major meme stocks in the Roundhill Meme ETF — including tech play Marathon Digital and consumer discretionary firms Carvana and GameStop — are on pace to burn through all their cash and short-term investments in less than two years. And much less than 24 months in some cases, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. The analysis is based on these companies' free cash flow in the past 12 months vs. the cash and short-term investments at the end of the last reported period.
Such haunting realities are a bitter reminder of the risks investors are taking when they pile into these stocks long on hype but short on cash flow.
"The market may well continue to reward this reckless behavior for a while, but it always ultimately punishes foolishness — so don't fall for the speculative garbage," said Whitney Tilson of Empire Financial Research.
You've been warned.
Meme Stocks Throw Caution To The Wind
Most meme stocks are struggling companies with suspect financials. But they're popular on online discussion boards like Reddit and small enough to push around in price.
And that's been enough to embolden investors to jump in some of these stocks and try to make a quick buck. And it's worked with varying degrees of success. The Roundhill Meme ETF is up 7.1% since June. Not a great return, but marginally better than the S&P 500's 6.7% rise in that time.
Some of the meme stocks have done much better. Marathon Digital, for instance, is up more than 120% since June. And Carvana is up 52%.
But don't fool yourself. Unless these companies' financials materially improve, they will run into serious difficulty. And soon. That might explain why, despite recent rallies, Marathon Digital and Carvana shares are still down 64% and 85% this year, respectively.
Looking At Meme Stocks' Cash Flow
Interestingly, one of the top-performing meme stocks this year is one in the toughest financial spot: Marathon Digital.
The company burned through more than $1 billion in free cash flow in the past 12 months. That's mostly due to a capital expenditure of $994 million. The trouble is, the company only has $86 million in cash and investments, not even enough to sustain it for a month at that clip. Fortunately for Marathon, though, it only burned $52 million in cash from operations. The company's cash could sustain that level of spending for longer, but for less than two years.
More concerning is car seller Carvana. The company burned more than $2.6 billion in cash flow in the past 12 months. But only $724 million of that was capital spending. At that level of spending, the company would exhaust its $1.4 billion in cash and short-term investments in well less than a year.
GameStop might be the original meme stock, but it has struggles of its own. Its $1 billion in cash and short-term investments would vanish in only about 16 months based on its annual $778 million burn rate.
Happy Ending?
Sure, it's possible some of these meme companies will find money. Bed Bath & Beyond is reportedly looking to raise cash. But with investors pulling back and debt markets more expensive, even if these meme companies find money, they'll likely have to pay up for it.
And the realities of cash flow are far less entertaining than memes.
When Long Meme Stocks' Cash Runs Out
Based on free cash flow in past 12 months
| Name | Ticker | Years until cash, short-term investments run out | Sector |
|---|---|---|---|
| Marathon Digital Holdings | 0.1 | Information Technology | |
| Carvana | 0.5 | Consumer Discretionary | |
| Invitae | 1.0 | Health Care | |
| GameStop | 1.3 | Consumer Discretionary | |
| AMC Entertainment Holdings | 1.6 | Communication Services | |
| Novavax | 1.7 | Health Care | |
| Lucid Group | 1.8 | Consumer Discretionary | |
| DraftKings | 1.9 | Consumer Discretionary | |
| Tilray Brands | 2.0 | Health Care |
