Meme stocks are now simply something we are getting used to here at The Armchair Trader. You can sometimes see them coming as social media fuels a frenzy of demand for a stock that many investors know little or nothing about, but they jump in all the same.
Newegg Commerce Inc (NASDAQ:NEGG) is just the latest in what is now a long line of stocks that are being fuelled by a large number of Robinhood traders in the US. This was a stock that was trading at around $13 at the start of this month and is now at close to $70.
Founded by Fred Chang in 2010, who is still CEO, Newegg does warrant some of the investor enthusiasm, it has to be said. It ticks many of the boxes for meme stock membership. For starters, it occupies the technology / gaming space that immediately makes it more favourable for meme stock traders who understand the dynamics of PC components.
Newegg sells the parts that its customers need to build computers. It ticked the second box of all meme stocks which is it produced a catalyst which got day traders interested. In this case it announced a $99 service which assembles the parts you order into a desktop computer. No more shopping for off the shelf PCs, no more building it yourself and finding that you forgot some key piece of hardware. For those on the quest for the ultimate gaming engine without the patience to stick it all together themselves, this was nectar.
I use a custom built PC myself and have to admit it is the best computer I’ve ever used, yet the components cost me less than $400. The equivalent factory built version from a UK retailer would probably be three times the price. Newegg is throwing down the gauntlet in this respect as it is bringing the market a much higher level of customisation.
But is Newegg stock really worth $70?
CNBC pundit Jim Cramer is sceptical of Newegg, calling it “total BGL game” – i.e. bagging, gunning and liquidation of stocks. He rightly questions whether Newegg is worth a market cap of $20bn (Wednesday 7 July) when it was only worth $10m in June. The introduction of an assembly service is a good idea, but it’s not that much of a game changer.
This leads me to the final part of the meme stock formula, which is the short interest. Meme traders LOVE a stock where there is considerable short interest, as they want to try to force hedge funds and other traders who have naked shorts to scramble to cover these. It creates forced buying activity which will just send the price higher.
The short interest ratio was over 30% at the end of June and had been attracting the attention of traders on Reddit. Newegg stock was not THAT liquid at the time, so again, traders reckoned it would form an interesting proposition should enough buy orders line up on the right side of the trade. However it seems that the news of the PC assembly service more than anything else has prompted the heavy buying activity.
