GameStop, AMC Have Exploded Over the Last Few Days for Dubious Reasons; Rally Seems Unsustainable

Meme stocks are back. Speculative investors, emboldened by the stock market’s best week (the week ended March 18) in four months, have jumped with both feet back into Reddit favorites like GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings, Inc. (NYSE: AMC). Just in the last two weeks, the stocks of GameStop and AMC have soared 94% and 49%, respectively.

The catalyst for the moves in the stocks appears to be investors’ decision to ignore the giant operating loss and operating cash flow shortfall in GameStop’s typically strong holiday quarter ended January 29, 2022, which it reported after the market close on March 17. The stock fell about 10% in after-hours trading that night, but investors changed their perceptions during the trading day on March 18, driving GameStop shares well above the St. Patrick’s Day close. No additional news was issued that day, as the company refuses to take questions from investors, but perhaps bullish traders decided to focus on the company’s vague diversification plans to establish a non-fungible token (NFT) marketplace.

GameStop’s March 18 performance turned out to be just a slight nudge off the launch pad, as the stock climbed each day this week, closing at US$151.95 yesterday, up dramatically from its US$87.70 March 18 close. A key reason for the increase seems to be GameStop Chairman Ryan Cohen’s disclosure that he bought an additional 100,000 GameStop shares to bring his holdings to 9.1 million shares, equivalent to an 11.9% stake in the company. For a less emotionally charged stock, an executive boosting his holdings by about 1% would have little impact. GameStop investors, on the other hand, apparently viewed this as a major statement.

In a related matter, on March 15, AMC Entertainment announced it was investing US$28 million in a small struggling gold mining company. Frequently, the market punishes a company which diversifies into areas completely unrelated to its core business as essentially a vote against management acumen. Instead, AMC stock rallied that day, apparently signaling the water for the stock was fine, at least in the short run. This week, AMC has followed GameStop’s movements higher, as the trading patterns for the two stocks have been closely linked for most of the past 13 months.

While GameStop and AMC have rallied sharply in recent days, investors should be mindful of two issues, neither of which are favorable for the companies. First, in early 2021, both GameStop and AMC were extraordinarily heavily shorted stocks; about 140% and 80% of their floats were shorted, respectively. The most recent data suggests a much lower probability of a short squeeze. Only 25% of GameStop’s and 20% of AMC’s floats were sold short as of February 28, 2022.

Second, over significant stretches of 2021, valuations and fundamentals seemed to have had little bearing on the two stocks, but in the end these factors are difficult to ignore. GameStop has an enterprise value (EV) of around US$10 billion, yet its adjusted EBITDA for the twelve months ended January 2022 was negative US$237 million. AMC’s EV is twice as high, ~US$20 billion, but its adjusted 2021 EBITDA was also negative, a loss of US$292 million.

It is challenging to justify GameStop’s and AMC’s valuations given their weak operating performance and fundamentals. Surely, investors can be optimistic that the companies will make diversifying investments that will provide growth in the medium and long terms. However, much of that hoped-for future growth would seem to have already been priced into the stocks.

GameStop Corp. and AMC Entertainment Holdings, Inc. last traded at US$151.95 and US$20.24, respectively, on the NYSE.

Information for this briefing was found via Edgar and the companies mentioned. The author has no affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply