Meme stocks like AMC Entertainment and GameStop tend to trade more on social media mentions than on the fundamentals of their businesses.
Yet not all such investments fall entirely into that category. With some meme stocks, the companies' underlying operations still have significant bearings on their valuations, but for varying reasons, their popularity has caused their prices to soar out of proportion to their businesses. That appears to be the case with Tesla, Nvidia, and Twitter, which are among the most-discussed stocks on WallStreetBets, the subreddit that really got the ball rolling on meme stocks.
But allow me to point you toward a pair of companies that meme stock traders love to discuss, that actually have solid long-term growth potential.
Image source: Getty Images.
Apple
Yes, mighty Apple (AAPL 0.51%) finds itself included among the ranks of the meme stocks even though the breadth of its business, its $2.4 trillion valuation, and the high level of institutional ownership of its shares (they hold almost 60% of the stock) would argue against it. Yet retail traders love to chat up the company.
No doubt part of the reason is that it's both widely held and (like many tech stocks) down sharply in 2022 -- almost 18% year to date. The European Union continues to set its sights on Apple, accusing it of restricting access to mobile wallets other than Apple Pay. The EU countries also just agreed to require a single standardized mobile charging port for all digital devices sold there beginning in 2024. That means Apple will have to build devices for that massive market that don't use its proprietary Lightning port.
Europe has long been a more intensively regulated market for tech companies, but Apple is still growing strongly there. It recently updated its Macbook Air, added a "buy now, pay later" feature to Apple Pay, and announced the launch of its new M2 chip. It also added new features to iOS to allow users to edit or cancel texts sent through iMessage, and later this year will be releasing the iPhone 14.
Of course, Apple's future is less about tech products and more about tech services, like Apple Pay, various digital content and cloud options, and advertising. The company will focus more on its advertising service in an effort to help smooth out the boom-and-bust sales cycles that are linked to devices' product upgrade schedules.
Service revenue reached a record of $19.8 billion in Apple's second quarter and now accounts for over 20% of the total revenue pie. Trading at 22 times next year's expected earnings, Apple is a reasonably priced stock for your portfolio.
Image source: Oculus.
Meta Platforms
Though it has "only" a near-$500 billion market cap, the ownership of Meta Platforms (META 0.14%) is even more broadly concentrated in the hands of institutional investors than Apple's is -- they hold more than 76% of its shares outstanding.
Yet with shares down 42% in 2022, the social media giant just might be too good a bargain to pass up. While there are concerns that its growth is slowing, or that it might even be shrinking, between Facebook, Instagram, and WhatsApp, Meta has some 3.6 billion daily active users across its platforms. That massive pool of individuals far outstrips every rival service.
For me, Meta's big bet on the metaverse is a less reliable indicator of the company's potential because I'm not convinced people will want to regularly interact using avatars in virtual reality spaces, though companies are investing vast sums of money on the theory that they will. I'd have rather seen Meta use the money it's spending on the metaverse to get its social media platforms back on track. Facebook did return to user growth last quarter and beat analysts' expectations, so the company hasn't forgotten about the social media space yet.
Trading at just 14 times next year's earnings estimates, less than twice its projected long-term earnings growth rate, and 13 times the free cash flow Meta produces, the stock is deeply discounted. That's a mispricing that both meme stock investors and more traditional investors should exploit.
