DURING the Covid-19 pandemic, meme mania swept through the United States stock market, short-squeezing and shuttering high-profile hedge funds.
That is nothing compared to what we are witnessing in the agentic artificial intelligence (AI) era.
The latest breed is different.
They are not struggling video-game or cinema chains – you might remember GameStop Corp and AMC Entertainment Holdings Inc – but trillion-dollar companies whose sheer size alone can distort and sink entire equity markets.
These mega-caps are destined to become meme stocks, because traditional valuation methods don’t apply.
It’s meaningless to talk about the earnings trajectory of SpaceX, formerly known as Space Exploration Technologies Corp, given the fantastic dream trillionaire Elon Musk is selling.
Fans are simply paying for a Musk premium, believing that they will be as handsomely rewarded as the early backers of Tesla Inc.
South Korea’s memory chipmakers Samsung Electronics Co and SK Hynix Inc are equally impossible to value.
They operate in a volatile industry where a business cycle can be as short as two to three years. As a result, any subtle shift in the perception of the length and magnitude of the cycle can move the needle.
Samsung, for instance, was valued at 26 times forward earnings in early 2023 before crashing to only eight times a year and half later.
Born to be meme stocks
Samsung’s valuation is as volatile as its earnings. Without fair value as an anchor, mechanical trading dynamics are in the driver’s seat.
The new catch-phrase is gamma squeeze, which describes a rapid surge in share price driven by bullish bets in the options market.
When selling a call option, market- makers have to buy the underlying stock as a hedge, thereby pushing up its price.
Contracts tied to SpaceX officially launched on Tuesday, with nearly one million call options traded and much of the volume concentrated on those that expired yesterday.
This perhaps explains why the rocket maker has overtaken Amazon.com Inc in market cap.
SpaceX’s free float – the percentage of outstanding shares trading in the open market – is only 7.5%, versus Amazon’s 91.8%, according to data compiled by Bloomberg.
The Hynix stock has gone volatile. Its number of call options outstanding has soared, too.
In South Korea, dealers have been busy hedging.
The number of call options outstanding on Samsung and Hynix has soared in recent weeks, due in part to the launch of leveraged single-stock exchange-traded funds, which need to rebalance daily with the use of derivatives.
These activities account for an estimated 60% to 70% of Hynix’s stock trading.
But these trillion-dollar meme stocks can be mean, too.
As derivatives trading takes South Korea by storm, the Kospi’s volatility has shot up.
More positions are being forced into liquidation, a sign that perhaps less savvy investors are getting caught in a high-stakes roulette that they don’t fully understand.
As for Musk’s die-hard fans, good luck funding a business empire with out-of-this-world capital spending needs.
Gamma hedging can be painful
Forced margin calls have jumped in recent days. So, what to do with this new meme craze?
As an asset class, the entire emerging markets is infected, because the two South Korean chipmakers account for about 15% of the benchmark MSCI index.
SpaceX is expected to be included in the blue-chip Nasdaq 100 Index in early July.
One could stay away and resist the temptation to replicate others’ success – you don’t want to be left holding the bag.
But don’t stand in front of the liquidity train, either.
Even Michael Burry of The Big Short fame said that while tempted, he had no position in SpaceX, because options used to wager against the stock are too expensive.
After all, this wave of meme trading is abetted and amplified by the powerful Wall Street machine, which has staked its prestige to validate gravity-defying valuations.
To help sell shares, Morgan Stanley predicted SpaceX’s revenue could reach US$3.4 trillion in 2040.
Meanwhile, a chorus of semiconductor analysts are talking up an AI-fuelled supercycle.
These bullish outlooks give retail investors the impression that the likes of SpaceX are still good deals. It’s a dynamic not seen during the 2021 GameStop days.
You may not believe that SpaceX can build AI data centres in space one day, or that memory chips are in short supply until the end of the decade.
But make no mistake: The trillion-dollar hype is upon us. — Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
