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AMC and Game Stop shares - are they worth buying?

Published by: 10.06.2021 14:45:05 It's not often that companies try to sell their stock along with a warning that if you buy their stock, you could lose everything.

But that's exactly what AMC Entertainment did Thursday when it disclosed plans to sell up to 11.55 million shares in an effort to take advantage of the incredible surge in its stock price fueled by retail traders who have banded together online to hurt sophisticated Wall Street investors.

"We believe that the recent volatility and our current market prices reflect market and business dynamics that are unrelated to our core business or macroeconomic or industry fundamentals, and we do not know how long these dynamics will last," the company warned the stock exchange.

"Under the circumstances, we caution you against investing in our Class A common stock unless you are prepared to risk losing all or a substantial portion of your investment."

The statement came after AMC shares ballooned 67% on Wednesday to close at $62.55 in a continuation of a meteoric rise fueled by social media rumors despite significant challenges to the company.

Shares were down 2% on Thursday as investors digested news of the company's plans to issue new shares, which unfortunately diluted their existing holdings. This strategic move did not please investors, as AMC has had a tumultuous ride since the pandemic began.

The company's theaters were temporarily closed, leading to a collapse in revenue and putting the chain on the brink of insolvency.

At the time, retail traders rallied behind AMC stock, sending the shares sharply higher in an effort to undercut sophisticated Wall Street investors who had bet on the stock imploding.

Now that theaters have reopened and moviegoers are returning, there is some hope on the horizon. However, the company's financial situation remains mixed.

The company's shares are still on the rise, having more than quintupled in the past month and are up more than 30 times since the beginning of the year.

Why is AMC stock rising?

Simply put, because retail traders are freely organizing the offering through social media discussion boards to increase the value of the company's stock.

The stock has also received a boost in recent days with the release of films such as "A Quiet Place 2" and "Cruella," raising hopes that more moviegoers may return to the theater.

Traders are also obviously encouraged by the news that AMC raised more than $230 million by selling 8.5 million shares of its common stock to Mudrick Capital Management. This was followed by a report from Bloomberg that Mudrick had decided to sell its stake at a profit, with the company considered overvalued.

News of a company diluting its stock by issuing more shares, as well as news of a major shareholder putting down its stake, would be considered a bad sign. However, the usual rules do not necessarily apply here.

"The retail power behind this movement is still strong, so it's anyone's guess how much this bubble may grow," Oanda analyst Edward Moya wrote in an analysis on Tuesday.

Is this related to the surge in GameStop shares?

The similar forces that have fueled the exponential rise in AMC stock are working very similarly for GameStop.

A coordinated group of retail traders were basically upset about how hedge funds were making money betting that shares of failing companies would fall. So they buy stocks, drive up the price and force hedge funds to take huge losses on their "shorts."

In the latest development for GameStop, the company's stock strengthened after Keith "Roaring Kitty" Gill, a major social media influencer, tweeted for the first time in over a month.

His tweet included a screenshot of a video of the "Six Stinky Cats" gang,  Moya wrote. "In typical Reddit Army fashion, the simple reminder of the Roaring Kitty's presence excited retail traders."

What is a meme stock?

A meme stock is any publicly traded company that benefits from the forces described above - a group of ordinary investors who use social media to drive interest in a company's stock.

GameStop and AMC are two of the most notable examples.

But there were others that also enjoyed modest increases, such as Bed Bath & Beyond and BlackBerry.

What's going on with Bed Bath & Beyond shares?

It's a similar story again. Like GameStop, the company has struggled with an overhang of liabilities in recent years. But traders have rallied around its stock.

Bed Bath & Beyond shares rose 59% to $44.19 on Wednesday.

What are Reddit shares


Any stock that benefits from traders orchestrating its appreciation through posts on Reddit. Again, this includes GameStop, AMC and Bed Bath & Beyond.

Should these stocks be part of your investment portfolio?

Every investor's situation is different. But if you invest in meme stocks, you need to be prepared for extreme volatility. The up and down swings can be intense.

On the other hand, you can achieve really high increases. Some investors have made a fortune, but you can also lose a lot, or even lose everything.

And it's always important to remember that when a company's underlying finances are compromised, there can be a risk of collapse or even bankruptcy, which usually results in the loss of all shareholders' deposits.

Where does AMC stand now?

It's hard to say.

AMC Entertainment lost about $4.6 billion in 2020, compared to a loss of $149 million in 2019. The company's revenue fell 77% to $1.24 billion as U.S. movie ticket sales fell 81%. Those are ugly numbers.

Yes, the latest box office results provided some hope. But the company continues to face Hollywood's growing willingness to release movies on streaming platforms like Netflix, Hulu, Disney+ and HBO Max.

The company warned last year that it may not survive.

"We are seeing some signs of amplified viewer demand for movies for this summer and during the holiday season," Tuna Amobi, an equity analyst at CFRA Research, said in a May 26 report. 

But with Hollywood studios now looking to their own streaming platforms, we think AMC faces strong barriers to a return to pre-pandemic normalcy. This move by Hollywood studios could threaten the existence of many companies in the same industry. 

Thank you for reading this far. As you can see, "MEME STOCKS" can be a shortcut to getting rich, but you can also lose the entire amount of your investment. However, if you are looking for a proven and reliable strategy for appreciating your investment, feel free to contact us. Our strategy is heavily diversified, primarily to prevent potential loss and thus always be able to give you a nice value for your investment. 

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