A year after GameStop mania, meme stocks have tumbled

New York(CNN Business) It's been a little more than a year since the meme mania in GameStop began. It's shaped up to be, to put it extremely mildly, a wild ride for it and other meme stocks like movie theater chain AMC ever since.

GameStop (GME) and AMC (AMC) are up sharply from a year ago, but they're off to a brutal start in 2022. Shares of GameStop have plunged nearly 35% in January while AMC has plummeted more than 40%.

These two stocks caught fire in early 2021 as so-called memes -- companies with rabid followings among individual investors -- took off. Much of their success could be attributed to traders who were fans of the brands, maybe even more than the stock fundamentals.

And Robinhood, which went public last year briefly and became a meme stock itself following its initial public offering, has tumbled as well. Robinhood is down more than 25% this year and is trading at an all-time low.

The plunge in Robinood, ironically enough, might be cause for celebration for other meme investors: the so-called "apes" on Reddit who attacked Robinhood last year for briefly restricting the buying of shares of GameStop and other meme stocks. Some argue that was done to benefit hedge funds who were losing money by betting against these companies.

So what does the big pullback in meme stocks say about the broader market? And has sanity returned to investing, or will the meme stocks make a comeback?

Some experts argue that the rise of meme stocks is a good thing, if for no other reason than it helps to democratize the market. More Millennials and Gen Z members have started to realize that investing can be a way to build long-term wealth.

That said, many of these younger investors have more of a short-term trading mentality, particularly regarding stocks like GameStop and AMC and cryptocurrencies such as bitcoin.

"Last year's meme stock craze brought a surge of new, younger investors to the stock market," said Keith Chan, president of Moomoo, a trading app.

"This is not a passing fad," he added. "Investors are not done with meme stocks just yet. However, the speculative and volatile nature of this asset class underlines the critical need for a cautious approach when it comes to trading meme stocks."

Chan said that about half of the customers the app surveyed in a recent report indicated that meme stocks were "the biggest bubble," even more than cryptos and housing.

Earnings matter more than fads

Neither GameStop nor AMC are expected to be profitable this year, or even next. That is worrisome to experts, many of whom urge investors to put their money in big blue chips like Apple (AAPL) and Microsoft (MSFT).

"Investing in meme stocks carries reckless and unnecessary risk, which puts an investor's portfolio in danger of potentially devastating declines," said David Trainer, CEO of New Constructs, an investment research firm, in a report.

"We don't see a problem with paying a premium for a company producing strong profits, but none of the meme stocks are producing strong profits," Trainer said, adding that valuations of the most popular meme stocks, especially GameStop and AMC, "remain untethered from reality."

The ginormous sell-offs in meme stocks at the start of 2022 may be a sign that investors recognize how bubblicious last year's rally was. That said, younger traders may now just be flocking instead to new themes (over memes).

According to a look at the top stocks owned by millions of investors on the trading technology firm Apex Fintech Solutions in the fourth quarter, Gen Z investors were more interested in companies like metaverse/gaming leader Roblox, electric truck maker Rivian and mobile payments giants Block (SQ) (formerly Square) and PayPal (PYPL) -- even though these stocks all have plunged this year, too.

So how likely is it that younger investors listen to the wisdom of some of their elders and put money in diversified funds that own a basket of stocks instead of going all in on meme stocks?

"The public remains more active in the market than they were prior to the pandemic," said analysts at S&P Global Market Intelligence in a report Tuesday. "We expect this overall heightened level of retail engagement to persist, though sudden rallies in single stock names now seem less likely."