Meme Stocks Are Back, But They May Soon Crater

By Faisal Humayun, InvestorPlace.com

These meme stocks to avoid have weak fundamentals and a bleak growth outlook

  • These are the meme stocks to avoid that represent companies with weak fundamentals.
  • Lucid Group (LCID): Weak growth amid macroeconomic headwinds and cash burn remains significant.
  • GameStop (GME): Decline in revenue coupled with negative operating cash flows in a low margin competitive business.
  • Novavax (NVAX): Excitement related to the Sanofi deal will likely die soon with the biopharmaceutical company still building an early-stage pipeline.

Meme stocks have the potential to completely change the portfolio health even with a limited exposure of 5% to 10%. The best example now is Carvana (NYSE:CVNA), which surged from under-$5 levels at the beginning of 2023 to $117. At the same time, there are meme stock ideas that have destroyed wealth. These meme stocks to avoid are likely to cater in the coming quarters.

Note that some meme stocks represent companies with average to good fundamentals. Additionally, there are potential business catalysts that can support the rally. On the other hand, there are meme stocks that represent companies with weak fundamentals. When buying meme stocks, it’s important to focus only on ideas that decent businesses back.

The meme stocks to avoid represent fundamentally weak companies. These stocks have remained weak and are seemingly oversold. Investors should, however, avoid the trap of buying at these levels as the correction is likely to be sustained.

Lucid Group (LCID)

The correction has been unabated for Lucid Group (NASDAQ:LCID) stock. In the last 12 months, LCID stock has plunged by 62%. However, I believe there is further downside due to the meme stock.

It’s worth noting that Lucid Group currently commands a market valuation of $6.1 billion. For Q1 2024, the company reported revenue of $172.7 million. This would imply an annual revenue of $700 million. For a company that continues to report significant cash burn, a valuation of around 10x revenue seems stretched.

Another point to note is that for Q1 2024, Lucid reported operating level losses of $730 million. For Q1 2023, operating level losses were $772 million. Therefore, losses have been sustained at higher levels. With macroeconomic headwinds and intense competition, it’s a big challenge to scale-up and narrow losses.

The only positive for now seems to be a strong cash buffer and the impending launch of Lucid Gravity. I believe this might not be enough to deliver a reversal for LCID stock.

GameStop (GME)

GameStop (NYSE:GME) set the ball rolling for a historic meme stock rally of 2021. However, as the euphoria fizzled out, the focus was back on fundamentals. It’s, therefore, not surprising that GME stock has been in a sustained downtrend.

Amidst the broad downtrend, GME stock has rallied by almost 40% in the last six months. This is a good opportunity to exit. The stock traded at 52-week lows of $10 and will trade at new lows in the next 12 months.

For the last financial year, GameStop reported revenue of $5.3 billion. On a year-on-year basis, revenue declined by 10%. Further, operating loss was $34 million for the year. While operating losses narrowed, it’s clear that the business has low margins and does seem like an attractive investment.

Additionally, cash used in operations for the year was $204 million. Ultimately, the cash flows determine valuations, and I don’t see GameStop delivering healthy cash flows in the coming years.

Novavax (NVAX)

Novavax (NASDAQ:NVAX) stock skyrocketed by almost 100% in the last trading session. It seems that more gains are likely in the coming weeks, and I expect NVAX stock to trade in the range of $12 to $15. However, once the news-based euphoria is over, NVAX is likely to trend lower. I, therefore, see the rally as a good time for investors who have been trapped for an extended period to exit.

Coming to the news, Novavax announced a co-exclusive licensing agreement with Sanofi (NASDAQ:SNY). Under this agreement, Novavax will receive cash and an equity investment totaling $1.2 billion. In exchange, Sanofi will have a co-exclusive license to co-commercialize Novavax’s current stand-alone adjuvanted COVID-19 vaccine. Further, Sanofi will also have sole license to use Novavax’s adjuvanted COVID-19 vaccine in combination with Sanofi’s flu vaccines.

Without a doubt, the development is positive, but there are two concerns. First, the demand for COVID-19 vaccines is on a decline globally. Further, Novavax is still building a pipeline. The cash infusion will be used for clinical trials. There’s unlikely to be a sustained impact on revenue anytime soon. Therefore, the excitement will likely fizzle out and NVAX stock will trend lower.


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