The world’s flagship meme stock fell more 27% Thursday to $220.39 after the company’s recent announcement it intends to cooperate with an SEC investigation. It’s not a direct investigation into the GameStop Corp (NYSE:GME), rather it’s what the regulator refers to as the ‘phenomenon of meme stocks.’

In a more positive twist, GME just appointed a new CEO, Veteran e-commerce leader formerly from Amazon (NASDAQ:AMZN) Matt Furlong, and technology industry finance executive Mike Recupero as CFO. 

The company’s net sales increased 25.1% to $1.277 billion, compared to $1.021 billion in fiscal 2020 Q1 net sales. The video game retailer is doubling down on e-commerce. Hiring Matt Furlong runs in parallel with that strategy. It’s no doubt why GME is the flagship of meme stocks. 

The company made it a point to tell investors they do not foresee any problems arising from the investigation. The move by the SEC was prompted by January’s insane GME rally, along with a number of other meme stocks. One big takeaway from all of this goes beyond how this will affect GameStop specifically. 

This will have a big impact on the meme stock phenomenon

SEC Chair Gary Gensler  said in a May 6 2021 testimony to the House Committee on Financial Services that he is focused on the “gamification of the retail investing industry.” Specifically how predictive algorithms are playing a part in influencing people to buy stocks on mobile platforms. This may mean an end to meme stocks as we know them, or it could also fizzle out. Only time will tell. 

“If we watch a movie that a streaming app recommends and don’t like it, we might lose a couple of hours of our evening. If a fitness app nudges us to exercise, that’s probably a good thing. Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position. A big loss could have immediate implications for the app user’s ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement,” said Gensler.

The SEC’s position on the matter notwithstanding, they can’t do much about social media-fueled rallies at this time. When Robinhood stopped customers from acquiring positions in GME, it was a real wake-up call for investors. If yesterday’s GME share plunge indicates one thing, it could be that many small-time retail investors got scared by the investigation, and they aren’t wrong for worrying that regulatory bodies and brokers. Reddit-fuelled stocks in particular are a worry as the platform is utilized by others looking to stick their stock picks in and drive up share price.

Even though the company does not believe it will be adversely affected by the SEC investigation, their recent news was not enough to avoid the stock’s over 25% drop. 

Key Takeaway

Retail stocks have been on the downswing, but certain stocks seem to not just be hanging on through thick and thin but also thriving. GME is one of them, and the main reason for that might not have anything to do with the stock or company itself! 

Reddit’s WallStreetBets and the investing community at large have not dropped GME. One simply has to see the sentiment from Reddit users to know that it’s about sticking it to the man. This is seen illustrated most eloquently by one Reddit WallStreetBets user:

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