Meme stocks are unpredictable because they aren't grounded in strong fundamentals, and instead are dependent on internet trends and what's popular on social media. It can be exciting to jump on a red-hot stock that looks like it's destined to continue going higher, but the danger is that once the party and the hype are over, you could be left holding a very expensive bag.
A couple of meme stocks that stand out as incredibly risky today are Zomedica (ZOM -0.84%) and Digital World Acquisition Corp (DWAC). Built on not much beyond internet hype, these stocks are likely headed lower this year. Here's why:
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1. Zomedica
Healthcare company Zomedica offers diagnostic and testing products for veterinarians. However, its flagship product, the Truforma platform, launched last year commercially and is relatively unproven. Shares of Zomedica have fallen a staggering 80% over the past year. Betting on this meme stock in 2021 would have turned a $10,000 investment into less than $2,000 today. By comparison, investing in the S&P 500, which has risen 15% during that time, would have resulted in a gain of more than $1,500 for your portfolio. Going with the broad index may have been a boring option, but it's safer. And that's not likely to change moving forward.
Although the sharp decline in price has made this a cheaper stock to own, it still isn't worth taking a chance on the company. In 2021, Zomedica reported a loss of $18.4 million on net revenue of $4.1 million. A year ago, the business had no revenue. But the big jump wasn't a result of a huge uptick from Truforma sales. Instead, it was the company's acquisition of PulseVet, a veterinary company that Zomedica acquired in October 2021, that led to the surge in revenue. Revenue from that business totaled $4 million for the three-month period ending Dec. 31. The company's own Truforma platform generated revenue totaling just $73,000. It was a year ago that the company announced the first commercial sales of its point-of-care diagnostics platform for dogs and cats, and there hasn't been much to show for it since then.
The saving grace for investors is that, with $195 million in cash and cash equivalents on its books as of the end of last year, Zomedica isn't in danger of running out of money. Last year, it burned through $14 million over the course of its day-to-day operating activities. Its cash balance should be sufficient to keep its operations going, but I wouldn't invest in a business that has to lean on acquisitions as heavily as Zomedica does. Its main product, Truforma, hasn't shown much promise, and operating expenses of more than $24 million this past year will make it difficult for Zomedica to get out of the red anytime soon, even with the help of PulseVet.
2. Digital World Acquisition Corp
An even riskier buy than Zomedica is Digital World Acquisition, a special purpose acquisition corporation that is taking Trump Media & Technology Group public. This business doesn't even generate revenue yet. And the reason for its popularity is simply due to the hype surrounding former U.S. President Donald Trump and his new social media platform, Truth Social.
The truth is that the platform hasn't been off to a great start. Early users have complained about long waitlists to even get on the platform, and there have been numerous technical issues as well. Even the former president himself has reportedly been frustrated with the rollout and hasn't posted anything on Truth Social since it launched in February.
It cannot be accessed via a website, and currently, it's only available for Apple iPhone users. And from the app's screenshots, it looks to be remarkably similar to Twitter, which permanently banned Trump from its social media platform over a year ago.
There's not much for investors to invest in at this point. Besides just hoping that Truth Social takes off and lures away millions of users away from Twitter or other social media platforms, the stock doesn't warrant any excitement. And if at such early stages the app is already running into issues, investors shouldn't expect the future to look a whole lot brighter. For example, Alphabet's Google Trends data suggests that interest has fallen sharply since February's launch, with searches for "truth social" down to just 8% of the peak levels they reached a month ago.
Year-to-date, shares of Digital World are up 35%, but unless there's a significant improvement in Truth Social's app and proof that it's attracting users, shares of the stock are likely to decline from here on out.
