Where are they now? The anatomy of an ASX meme stock - past, present (and future)

The meme stock, or ‘memestonk’ – a unique phrase in financial parlance, which gained traction in the halcyon days of the post-COVID bull market.

What turns a stock into a stonk, exactly?

It’s an inexact science, but here’s a key prerequisite; said stock has to undergo a material appreciation in its share price.

So a stock can’t be a stonk unless it’s ramping to the moon. But more specifically, the evolution to ‘stonk’ is typically created by a contrast between company fundamentals (such as operating cash flow, which is often negative), and a heady mix of speculation and news flow in an environment of booming trade volumes.

If a stonk rips hard enough, it can catch the eye of online entertainers who dabble in the dark arts of equity capital markets and linger in forums such as Reddit and Twitter.

Hence, the meme component:

US video game distributor GameStop most likely lays claim to the title of the world’s foremost memestonk.

Its January 2021 peak well and truly met the ‘booming trade volumes’ component of the equation; a move exacerbated by complex trader positioning which saw aggressive short sellers get closed out, which in turn drove the stock even higher.

While the ASX won’t match US capital markets for liquidity depth, the local index has played host to a number of companies which fit the meme stock criteria.

In something of a ‘where are they now?’ exercise, we’ve compiled a list of stocks that fit the bill.

We’ve accompanied that with a quick summary of how they’re performing now, in a post-Covid world where a new Cold War looks imminent and financial conditions are tightening.

Code	Company	Price	% Month	% 6-month	% Year	Market Cap
SZL	Sezzle Inc	1.10	-25.9%	-80.8%	-86.7%	$235,265,141
Z1P	Zip Co Ltd	1.29	-18.1%	-80.6%	-84.5%	$904,546,850
SQ2	Block Inc (Afterpay)	165	12.7%	N/A	N/A	$7,350,036,548
BRN	Brainchip Ltd	0.9	-12.6%	130.8%	69.8%	$1,482,923,255
MSB	Mesoblast Limited	1.145	0.0%	-23.9%	-48.7%	$744,770,461
IMU	Imugene Limited	0.22	-12.0%	-47.6%	33.3%	$1,228,093,197
AXE	Archer Materials	0.935	-2.6%	-34.6%	2.7%	$219,096,978
SPX	Spenda Limited	0.019	-9.5%	-67.2%	-77.9%	$52,823,814
VUL	Vulcan Energy	9.03	-4.3%	-21.5%	41.3%	$1,170,324,850
KNI	Kuniko	1.14	75.4%	-41.5%	N/A	$46,448,712

The conductors

The ASX cohort of semiconductor stocks has put together some impressive rallies over the past two years.

We’ll lead off with this category because it includes the arguably the most pure encapsulation of a meme stock; AI chip manufacturer Brainchip (ASX:BRN).

When the pandemic struck in March 2020, BRN was trading between 3-5c.

Thereafter, it kept investors updated about the path to market for its chip technology, which it said creates efficiencies by mimicking the neural network of the human brain.

The BRN ramp culminated in huge rally at the start of this year, which saw the stock hit an intraday high of $2.34 on January 19.

(Gainz, you ask? From 3c on March 20, 2020, that’s about 7,700%).

On that day (January 19), Stockhead spoke with Luke Winchester articulated why he thought the stock looked frothy.

Yesterday, BRN closed at 90c. Still a material re-rating from 2020, but down +60% from its post-COVID highs as investors await the March quarter 4C filing.

For semiconductor stocks, one key element in the ‘news flow’ component of the memestonk equation relates to patents.

Brainchip’s peak on January 19 coincided with a US patent in connection its neuromorphic artificial intelligence technology.

Another ASX semiconductor play, Archer Materials (ASX:AXE), reached memestonk territory in the middle of last year after flagging multiple patent approvals in August and September; one in South Korea, one in China and another in the US.

Investors briefly sent the stock surging above $3 (up from <20c in March 2020). Like Brainchip, it came back to earth and currently trades below $1.

BNP-hell

While Brainchip may hold the post-Covid meme stock title, the ASX’s most talked about payments cohort has arguably produced the most memestonks as a sector.

Afterpay’s rally – from ~$8 in March 2020 to a February 2021 high of $158 – was worthy.

But as evidence of the sector’s current challenges, APT’s half-year December results from new owner Block Inc (ASX:SQ2) this week turned heads, mainly for the wrong reasons.

While it drove revenue growth by 55% to $645m, after-tax losses blew out to more than $350m.

The 55% growth in revenue also came with a 145% lift in bad debt expenses to $177m.

And the company booked net operating cash outflows of $757m for the half-year – a possible indicator in favour of the argument put forth by BNPL bear UBS bank that while BNPL models scaled fast in the pandemic, they are also more capital intensive than the top-line numbers indicate.

How are the other BNPL memestonks going?

US-based Sezzle Inc (ASX:SZL) rose from 40c in March 2020 to a February 2021 high above $11 (also meme stock worthy).

At those heights, it came into the sights of short-sellers and the company has failed to offset investor doubts heading into 2022.

At yesterday’s close of $1.10, Sezzle is now trading below its July 2019 IPO price for the first time, ahead of its proposed takeover by Zip Co (ASX:Z1P).

Z1P’s surge saw it rally from ~$1.20 to more than $12 at the post-Covid peak.

The stock has now completed the trip all the way back to its crisis lows. For now, the equity capital markets are still open for Zip Co, as evidenced by a $150m share placement in March to fund the Sezzle acquisition.

But for now, its underwriters are on the hook to pay the $1.90 placement price – a hefty 30% premium to yesterday’s close of $1.29.

Momentum vs Reality

Winchester faced the wrath of the Brainchip army in his appraisal of the stock, but he provided a useful summary of how pro investors think about red-hot memestonks.

Trading momentum and the ‘greater fool theory’ can equal fast money, but investors also have to make a judgment call about when the market will demand that business metrics need to catch up the frothy valuation.

Getting the balance just right effectively means predicting the future (not easy).

As a side-note, here’s what legendary US investor Stan Druckenmiller’s mentor taught him about just that (predicting the future).

“Never, ever invest in the present. It doesn’t matter what a company earns, what they have earned. He taught me that you have to visualise the situation 18 months from now, and whatever that is, that’s where the price will be,” Druckenmiller said.

“Too many people tend to look at the present. ‘Oh this is a great company, or this central bank is doing all the right things’. But you have to look to the future. If you invest in the present, you’re going to get run over.”

And this:

“The other thing he taught me is that earnings don’t move the overall market, it’s the Federal Reserve Board… it’s liquidity that moves markets.”

Is that last point relevant to the pandemic?

As a health crisis, it resulted in the biggest liquidity dump of the modern investment era, where central bank stimulus was accompanied by historic levels of government support.

For the first time in 40 years, inflation is now holding stubbornly above the 2-3% global target.

Central banks are getting the raise rates vibe – maybe fast. Policy is tightening, and companies are operating in a market with less liquidity. Earnings are back in focus.

In that context, investors who looked ahead by 18 months and accurately assessed the liquidity outlook may have done very nicely out of the memestonk trade.

But as Dean Fergie told Stockhead in a BNPL discussion last month, markets look different now.

“I think clearly the market’s got concerns because the bottom line is these businesses are still tearing through money,” Fergie said.

“The per-unit economics are getting tougher and in a tighter liquidity environment, investors are more discerning.”

The meme stock – around the grounds

With the benefit of hindsight, that liquidity environment peaked in February 2021, which is when bond markets first started rumbling.

Another payments memestonk that reached its zenith was Cirralto, which has since rebranded to Spenda (ASX:SPX) following an acquisition.

During the March 2020 crisis, SPX was a penny stock which traded below 1c.

But in the hands of momentum traders, it got on the move and surged to an intraday high of 20c in February last year on torrid volumes.

In the same month, Spenda flagged an $18m share placement at 9c per share, but 2021 proved to be tougher going.

It booked net operating cash outflows of more than $3m in the December quarter, and is currently trading back below 2c.

The next trade

Most post-Covid ASX meme stocks have completed the downramp section of the stonk rollercoaster, but equity capital is always looking for a home regardless of any broader macro forces.

So the high-growth tech surge has, for now, been replaced by the commodities super-cycle.

While the fundamentals around commodity prices look strong, the sector has still thrown up its share of speculative mooners driven higher by momentum and optimism.

Of note is base metals play Kuniko (ASX:KNI), which earns a special mention by virtue of its status as a memestonk spun out from a larger memestonk.

Market darling Vulcan Energy (ASX:VUL) packaged up two of its exploration projects in Norway, Skuterud (cobalt) and Vangrøfta (copper), before re-listing them in the separate Kuniko entity.

After raising capital at 20c on August 24, Kuniko topped out at $3.38 on September 2 — good enough for a 1,600% gain in eight days.

It cooled off all the way to 68c in March, before a solid rally over the past month saw it climb back above $1.

Kuniko’s god-parent, Vulcan, was the best performing stock on the ASX in the COVID-19 era, climbing from 20c on March 20 to a September 2021 high of $15.90 – a gain of almost 8,000%.

It hasn’t scaled those heights since the infamous J Capital short report last October, but has still consolidated around $9.

For red-hot resources stocks, the stage is set; can they match the hype with execution on their operating metrics in a favourable macro environment? Or will investors demand more – just like they have from semiconductor stocks and payments companies?

Whether or not the stonks turn into blue-chip large caps, for now we’ll have to make do with the memes:

When the $AZL approvals come through, you’ll be asking yourself “why did I sell?” 😂 pic.twitter.com/MbJQXnynIu

— wognutz (@wognutz1) December 6, 2021