Meme stocks -- or hot stocks that gain viral followings on social media -- often trade on market hype instead of any fundamental strengths. That's why many investors broadly dismiss meme stocks as low-quality investments for short-sighted traders, and why many of those buzzy stocks were rightfully wiped out as interest rates rose over the past year.
But not every meme stock is a troubled company. Some of those meme stocks -- like Coinbase (COIN 5.68%), Shopify (SHOP 1.11%), and Unity (U 3.47%) -- might actually head higher over the long term.
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1. Coinbase
Coinbase, one of the world's largest cryptocurrency exchanges, went public via a direct listing on April 14, 2021. It started trading at $348.90, a 40% premium to its reference price of $250, and eventually hit an all-time high of $357.39 during the apex of the meme stock rally on Nov. 9, 2021. But today, Coinbase trades at about $78 per share.
Coinbase's stock plunged as rising interest rates, tighter regulations, and the failures of several high-profile cryptocurrency exchanges caused the crypto market to crash. In 2021, its revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) skyrocketed 545% and 676%, respectively. But in 2022, its revenue plunged 51% and its adjusted EBITDA turned negative as a new "crypto winter" began.
That dramatic reversal drove the bulls away. However, Coinbase laid off 20% of its workforce last year, cut another 20% of its remaining staff this year, and continues to rein in its operating expenses. Analysts expect it to generate a positive adjusted EBITDA of $728 million this year as those savings kick in -- even as its revenue declines another 11%.
Coinbase's near-term future might seem grim, but its growth could accelerate again once the crypto market stabilizes. It looks reasonably valued at six times this year's sales and 23 times its adjusted EBITDA, so it could still have a lot of upside potential if you believe the crypto market will recover from its current downturn.
2. Shopify
Shopify's e-commerce platform allows merchants to launch their own online stores, fulfill orders, process payments, and manage their own marketing campaigns. Its stock surged to an all-time high of $169.06 on Nov. 19, 2021 as investors were dazzled by its explosive growth rates during the pandemic. But as of this writing, it trades at around $67.
Shopify's revenue soared 86% in 2020 and 57% in 2021. Its adjusted net income surged 1,332% in 2020 and rose 66% in 2021. Unfortunately, that breakneck growth set it up for tough post-pandemic comparisons. In 2022, its revenue only grew 21% as its adjusted net income tumbled 94%. Inflationary headwinds and the expansion of its first-party logistics network (through its acquisitions of 6 River Systems and Deliverr) further compressed its margins.
That mix of slowing growth, rising expenses, and intense competition from similar services like Adobe Commerce, BigCommerce, and Amazon's (AMZN 3.43%) "Buy with Prime" made Shopify even less appealing. But earlier this year, Shopify made some drastic changes: It sold its entire logistics division to Flexport in exchange for a 13% stake in the private company, laid off a fifth of its workforce, and struck a deal with Amazon to integrate Shop Pay with Buy with Prime.
Analysts expect Shopify's revenue and adjusted earnings to grow 24% and 1,125%, respectively, this year, as it finally laps its post-pandemic slowdown and the macro environment improves. It's still pricey at nearly 100 times forward earnings and 12 times this year's sales, but its stock could head higher as the broader e-commerce market stabilizes.
3. Unity
Unity's game engine powers over half of the world's mobile, console, and PC games. It also provides the tools to monetize those games with ads and in-app purchases. After listing its shares at $52 via a traditional IPO on Sept. 18, 2020, Unity's stock opened at $75 and rallied to an all-time high of $201.12 on Nov. 18, 2021. But just like the other meme stocks, Unity lost its luster as interest rates rose, and it now trades at about $37.
Unity's revenue surged 43% in 2020 and 44% in 2021 as developers flocked to its platform to create new games throughout the pandemic. But in 2022 its revenue only rose 25% as the gaming market suffered a post-pandemic slowdown and Apple's privacy update on iOS derailed its advertising algorithms. That abrupt deceleration, along with its lack of stable profits, caused its stock to crash.
But over the past year, Unity expanded beyond the gaming market with fresh tools for creating theatrical special effects, virtual and augmented reality apps, and "digital twins" of real-world objects. To counter Apple's iOS changes, it merged with the ad tech company ironSource last November and rebooted its entire advertising business. It also executed three rounds of layoffs to stabilize its operating margins.
Unity's slowdown hasn't ended yet. On a pro forma basis (including ironSource), it expects its revenue to only rise 5%-9% this year as it faces more macro challenges. But if the macro environment improves, Unity's growth could accelerate again -- and its stock doesn't seem that pricey at seven times this year's sales.
