How do most companies die?
Some blow up spectacularly. Firms like Lehman Brothers and Long Term Capital Management left craters in the U.S. banking sector when leverage caught up with them. Others vanish in million-dollar buyouts. HP bought Compaq for $25 billion in 2002 and discontinued the trademark 11 years later.
However, most companies die by fizzling out. According to the Tax Foundation, 85% of all American businesses are sole proprietorships, which cease to exist once the business owner decides to stop working. In other words, these firms simply age out.
Meme stocks operate the same way. These social media darlings tend to collapse once their underlying business runs out of steam. No amount of retail investor love can reliably turn a dying business into a thriving one.
That makes these five meme stocks particularly interesting. On the one hand, retail investors love these firms; they’re consistently the top-mentioned companies on social media and the stocks command considerable premiums.
On the other hand, these firms all have dying businesses and will unlikely last beyond 2030. Unless they can find someone else to mind the shop, these retail darlings will find themselves in the same category as sole proprietorships at the end of their life — aging out and ready to retire.
1. GameStop (GME)
Texas-based GameStop (NYSE:GME) is a prime example of a geriatric company that’s failing to adapt. According to its most recent filings, 84% of its revenues still come from hardware, accessories and videogame software — products readily available online. Management has failed to make much headway in Web 3.0 gaming and NFTs.
Instead, GameStop’s top brass are now cutting back on everything from capital expenditure to rank-and-file salaries. On May 19, staff at an entire GameStop store in Michigan quit on the same day to protest awful working conditions.
“Management overworks, underpays, and under-appreciates its frontline workers, sets unrealistic expectations and constantly threatens termination for any employee that cannot exceed them,” the workers noted.
This is effectively a business-planning problem. GameStop sells physical video games in an era where copies are mainly sold online. According to an analysis by Ars Technica, 89.1% of all games are now available only through digital download. The figure is particularly lopsided for consoles like the Nintendo Switch, where digital copies dominate.
That leaves GameStop looking like a Blockbuster or Redbox — a corporation with limited time left. Management has recognized this fact and is milking GameStop for its remaining cash. Investors should do the same and leave while shares trade at a premium.
2. Mullen Automotive (MULN)
I’ll admit that Mullen Automotive (NASDAQ:MULN) has lasted far longer than I expected. Every time the popular electric vehicle startup has run short on cash, its management has found a way to tap its creditors for more money. The company has yet to generate a cent of preorder revenue.
The firm, however, might soon reach the end of its funding rope. As I explain here, Mullen is now trapped in a “funding death spiral” where convertible share issuances create downward pressure on the stock, creating more dilution, and so on. The cycle eventually makes its common stock worthless.
Mullen also has another problem:
It’s struggling to create production-ready vehicles.
The company has now delayed the commercial version of its FIVE crossover SUV to as late as 2025. And a 1,000-truck delivery to Randy Marion has been pushed back from Q1 2023 to August.
Some EV startups can get away with major delays, especially if they’re collecting significant customer deposits to help fund production. But Mullen has failed to collect any preorder revenue, suggesting that car enthusiasts aren’t that interested. Although Mullen has survived in its current iteration since 2015 without producing revenue, no zero-revenue company has ever survived forever.
3. Beyond Meat (BYND)
Consumer packaged goods is a notoriously tough business. Most successful breakouts like Amplify Snack Brands — the maker of Skinny Pop — only manage to create a single one-hit-wonder before fizzling out. Its forays into Paqui chips, Tyrrells or Oatmega failed to excite.
That’s because most food fads are transient by nature. Pre-popped popcorn had a brief moment in the mid-2010s, as did Greek yogurt… keto… acai… gluten-free… kombucha… coconut milk… (I’m still unsure how to pronounce “quinoa”). It’s rare for companies to land on two consecutive trends, never mind hitting one at the right time.
That means Beyond Meat’s (NASDAQ:BYND) investors should tread carefully. Wall Street analysts expect growth at the meat-alternative company to resume in 2024, and for 2025 revenues to exceed its 2021 high watermark. But a close look at grocery store shelves quickly tells us that consumers have moved on from plant-based patties. As reporters at Bloomberg note, “Meatless meat, it turns out, seems less a world-changing innovation than another food trend whose novelty is wearing thin.” In its place, we’re seeing sustainable foods and farm-raised meats take over.
Beyond Meat isn’t the first packaged food company to get lucky. Amplify Snack Brands itself saw shares rise as high as $17 in 2016 on Skinny Pop excitement. Shares would later drop below $5 before Hershey (NYSE:HSY) bought out the company for $12.
Beyond Meat now finds itself in a similar situation. Investors could get lucky if a larger rival makes a bid. But if no established firm intervenes, the meat alternative company will likely continue its slow decline.
4. Peloton Interactive (PTON)
The fitness industry has a similar boom-bust cycle. Diet fads like Weight Watchers come and go… and so do exercise bike fads that powered Peloton’s (NASDAQ:PTON) meteoric rise.
Peloton is a New York-based maker of stationary bicycles that was founded in 2012 as a Kickstarter idea. The company became a sensation during the 2020 Covid-19 lockdowns and reached a $50 billion market valuation by January 2021. Even President Joe Biden was a fan, with his exercise routine becoming a symbol of his presidency.
But much like former President Barack Obama’s love of Blackberry phones, Biden’s preference for $2,000-plus exercise bikes couldn’t save Peloton from falling out of favor. For 2023, analysts expect the firm to generate only 70% of its 2021 revenues.
Peloton has also failed to make headway in rowing machines or treadmills. Its $44-per-month memberships are proving unpopular with users in these competitive areas. Traditional gym equipment is also a dead-end. The industry is historically money-losing and will only deepen Peloton’s financial troubles.
Of course, Peloton won’t vanish all at once. The firm generates $2.8 billion annually in revenue — almost 10 times more than Bowflex maker Nautilus (NYSE:NLS). But with only $874 million in cash remaining and an $800 million cash burn rate, Peloton doesn’t have long to live.
5. Bed Bath & Beyond (BBBYQ)
In May, the Wall Street Journal noted how many retail investors were hanging onto shares of the bankrupt home goods retailer.
“I think that Bed Bath & Beyond, (OTCMKTS:BBBYQ) even in bankruptcy, is one of the best deals in the stock market,” a 25-year-old investor told journalists. “You can call me a conspiracy theorist.”
Shares, however, are likely worth zero. Bankruptcy documents revealed the retailer had $5.2 billion in debt and only $4.4 billion in assets, giving it a negative $800 million in equity value on paper.
The truth could be even worse. Retailers require significant markdowns to liquidate excess inventory, and the value of rented physical stores is usually far lower than stated. A $200,000 store renovation for Bed Bath & Beyond, for example, doesn’t increase a building’s value to a bowling alley or grocery store that takes its place. (Owned stores work the opposite way, where equity values are understated).
That means even a successful auction of Buy Buy Baby will unlikely make shareholders whole.
Speculators might still want to gamble on the New Jersey retailer’s over-the-counter (OTC) stock. A surprise sale of Buy Buy Baby in the $2 billion range would send shares soaring. But for most long-term investors, it’s better to avoid this dying retailer getting sold for parts.
Conclusion: What About AMC Entertainment?
That’s because these companies continue to create products and services that their consumers love (or, at least put up with). This week, the movie Spider-Man: Across the Spider-Verse set a record-breaking opening weekend for Sony (NYSE:SONY). It’s a sign that AMC Entertainment could see accelerating sales in H2 2023 as several big-name movies get released. Meanwhile, Palantir continues to make headway in artificial intelligence deals. Even Blackberry has managed to reinvent itself from a struggling phone maker into a cybersecurity firm.
But companies like GameStop and Mullen operate differently. These firms are biding their time as their businesses run their course. Best to get out while you still can.
As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.