A meme is something that grows in popularity on the Internet. Typically it refers to an image with a funny caption, but with more retail investors buying stocks, it has spread into the investing world as well -- and there can even be "meme stocks" that rise in value mainly due to their growing popularity on the Internet. A good example is GameStop, where a struggling business found life and skyrocketed in value this year, largely due to its popularity on the /r/WallStreetBets Reddit forum.
The problem with an investment like that is there's not necessarily much substance behind it, and it's merely a speculative buy. Another stock that is popular on Reddit and that can potentially fall into the meme category is Sundial Growers (SNDL -5.31%). It has more than doubled in value this year, but is it really all due to hype, or is this a good investment that you should consider putting in your portfolio today?
Why has Sundial's stock been soaring?
For a stock to have doubled year to date (and vastly outperformed the S&P 500 index, which is up just 6%), you would expect there to be some big news or some incredible numbers behind the rally. But neither situation applies to Sundial. The most noteworthy development was its pursuit of Zenabis at the end of last year -- it bought the cannabis producer's debt, fueling hype that Sundial may be looking to make a possible deal. But it didn't end up acquiring Zenabis; HEXO did.
And the rise in value surely hasn't been thanks to its results. On Nov. 11, Sundial released its earnings for the period ending Sept. 30; revenue of $12.9 million was down 54% year over year, and its net loss totaled $71.4 million. On March 17, it posted its fourth-quarter numbers, which also weren't all that great. Revenue for the last three months of 2020 spiked to $13.9 million, up 8% from the third quarter, but that was also down 6% from the prior-year period. And although its net loss of $64.1 million showed improvement, Sundial was still deep in the red last quarter.
One thing that Sundial does have right now is options. On March 15, its unrestricted cash on hand totaled $719 million -- thanks in large part to a couple of offerings in February as the company took advantage of its rising share price. That gives management the ability to take on some acquisitions if it wants to. And the possibility of a deal is likely why investors are bullish on Sundial -- the right acquisition could make it a much better buy than it is right now, sending its share price up. In its latest earnings release, management said they "continue to explore strategic opportunities," looking at mergers, business combinations, and investments in not just Canada and the U.S., but other international markets as well.
Without the potential for a merger or acquisition -- or the hype surrounding this stock on the Internet -- shares of Sundial probably wouldn't be doing so well this year; there just aren't really any other reasons to invest in the company. Data from Alphabet's Google Trends shows that search popularity for Sundial Growers reached a peak during the period of Feb. 7 to Feb. 13. Here's what the stock did during that time frame:
Why you shouldn't jump aboard the bandwagon
It may be tempting to buy shares of Sundial and hope that Internet popularity does for it what it did for GameStop (which at one point this year was up more than 1,500%). But since Feb. 1, both stocks have fallen in value -- GameStop by 20% and Sundial by 7%, while the S&P 500 has risen more than 5%. Investors have begun to take a second look at some of their choices, and speculative buys have fallen as a result. I believe that if something doesn't make sense it will correct itself, and that applies to overvalued stocks. It may not happen right away, but that doesn't mean a correction isn't inevitable.
Retail investors may move on to other trends in the market (NFTs, perhaps?) or even pull their money out entirely if they get bored. And that's the biggest risk with buying meme stocks -- they are unpredictable. Hype that exists today could quickly fade tomorrow. And based on its underwhelming results and growing popularity on the Internet, Sundial definitely belongs in that category. If you're looking for a good and safe investment, steer clear of this one. There are plenty of better growth stocks out there.