Shares of the movie theater operator AMC (AMC) have been on fire since the beginning of June. AMC stock has already appreciated more than 80% in the month, while gains for the past half year have surpassed 2,400%.
The rally in AMC share price, however, has not been grounded on solid business fundamentals. Momentum alone has carried the stock to the moon. Today, Wall Street Memes debates whether meme mania can help to improve not only the stock price, but also AMC's financial position.
Victim of the pandemic
Meme stocks are described as such because their outsized short-term market gains are rarely consistent with the company's fundamentals. AMC certainly checks this box.
The company and the entertainment industry in general have been severely impacted by the COVID-19 pandemic, along with airlines and restaurants. Lockdown orders and stay-at-home habits punished AMC, a business that relies on consumers leaving the home and congregating indoors.
Financial results were not spared. In the second quarter of 2020, AMC reported a 99% drop in its revenues as operations largely ceased. Adjusted EBITDA remained in negative territory even as recently as first quarter 2021: $289 million loss versus $3 million profit in the same quarter last year. Free cash flow tanked to negative $324 million in a single quarter.
The obvious reason to justify such a drop in key financial metrics was the drastic decline in movie goers: down almost 90% year-over-year.
Meme target
Meme mania first reached AMC stock in January 2021. At the time, from one of the biggest short squeezes in history, shares jumped to $19, rising more than 900%. From mid-April to early June, the stock climbed another 500% or so, to peak at an incredible $72.
The company’s underdog status, following the pandemic headwinds, is probably behind AMC being chosen as a target of “meme attack”. Also, the stock had come under hedge fund scrutiny, as short interest increased on the back of deteriorated fundamentals.
Can meme mania save the day?
An increase in share price, even if inconsistent with fundamentals, can be beneficial to a struggling company like AMC. A stronger stock helps with (1) acquisitions and other deals, (2) being less vulnerable to takeovers and, (3) issuing shares for cash to improve the balance sheet.
Recently, AMCreporteda new stock offering, as the company raised $587 million worth of equity. According to AMC executives, the transaction would substantially strengthen the company's balance sheet and make it more capable of facing future challenges.
Wall Street Memes’ take
Thanks to meme mania, AMC may be able to clean up its financial statements more quickly, partially offsetting the impact of the pandemic. Given time, and with the reopening of the economy and the advance of vaccination campaigns, the entertainment industry should gradually recover on its own.
In the short term, it remains to be seen whether trader sentiment will cool off. For now, AMC’s sentiment metric, based on volume of favorable AMC comments on the Reddit forum, remains healthy – just not as high as it was earlier in June (see chart below).
