The meme stock craze of 2021 has brought wild volatility for several struggling companies. AMC Entertainment Holdings, Inc. (NYSE:AMC) is one of the top so-called meme stocks that Reddit users pushed to record highs in the first months of the year.
AMC operates the largest chain of movie theatres in Europe, the United States, and worldwide. They operate 10,500 screens in 950 theatres. Pandemic lockdowns were not kind to AMC, leading CEO Adam Aron to warn of impending bankruptcy.
Still, $1 billion in equity and debt investments kept AMC afloat until the meme stock frenzy hit in January 2021 .
TL;DR
- Meme stocks are driven to unusual trading movements due to social media users encouragement to buy the stock.
- While GameStop (GME) is the flagship meme stock so far this year, AMC Entertainment Holdings has been along for the ride.
- In January, WallStreetBets pumped up interest in AMC, taking its price from $2.06 January 6 to closing at $19.90 on January 27.
- AMC stock prices rose about 2,300% from the end of 2020 to June 4, 2021.
- Unlike GameStop, AMC has opted to sell new stock shares, adding more cash to its balance sheet.
What specifically caused the AMC rally in 2021?
The influx of meme stock trades originated from the online r/WallStreetBets forum. Members posted comments to hype up endangered companies, ultimately getting masses to buy shares of their stock.
Meme stock proponents have a couple of primary motivations for driving up the prices of failing companies:
- Many users of r/WallStreetBets want to stick it to the man or take away power and money from big investment companies who are shorting the stock. They aim to build conditions for a short squeeze, where a stocks price rises sharply, forcing short-selling investors to sell their shares to minimize their losses.
- Some investors try out day trading or options trading for the thrill of higher risks and potential gains.
As AMC stock continues to rise, individual investors rush to buy more. The Wall Street Journal noted, The recent activity in meme stock options underscores investors fear of missing out on the surges. Rather than a fear of price plummeting, they fear losing out if the price goes up further (hence the new ETF FOMO, which stands for fear of missing out).
Related: What are meme stocks and how do they work?
Why AMC?
The coronavirus pandemic pummeled AMC as long lost moviegoers relied on instant digital streaming options.
Bloomberg noted that AMCs popularity with investors doesnt purely reflect a love for movies or faith in AMCs long-term prospects. On the contrary, Redditors saw AMC as weak enough to be a likely target for short sellers, so it was ideal for influencing a short squeeze.
When AMC trades were halted
Heres when outside sources halted AMC trading in 2021:
- Thursday, Jan. 28: AMC and other stocks were briefly halted for volatility. Trading app Robinhood only permitted closing positions (no buying) and raised margin requirements.
- Wednesday, June 2: Share prices jumped over 100% and AMCs exchange, the NYSE, implemented a volatility trading halt.
Results of the meme stock popularity
The fact that so many individual investors hopped on board the meme stock train testifies to the power of social media. The influence of a few people can quickly snowball to cause masses of people to make investment decisions that are mutually exclusive from company fundamentals.
CEO Adam Aron is showing the companys appreciation of individual investors by offering a new loyalty program to shareholders with special offers and even free popcorn. He claims to prioritize investor relations, saying, These people are the owners of AMC, and I work for them. If it works well for AMC, other companies could take a similar stance.
For meme stocks, market gamesmanship is the focal point for meme stock traders.
Analysts say that meme stocks have grown more volatile as share prices have risen, which is unlike typical behaviors in options trading. Chris Murphy of Susquehanna Financial Group stated, These traditional relationships between volatility and stocks have been turned on their heads in meme stocks.
What to expect in the future for AMC
AMC filed paperwork on Thursday, June 3 with the SEC reporting that AMCs current prices reflect market dynamics unrelated to its business. With more than $5 billion in debt, theres more to consider than share price.
Bottom line
When it comes to AMC Entertainment, the future looks rather unclear. As the nation emerges from the pandemic, will moviegoers flock to AMC theatres as they once did, restoring the core of its business?
As the market has shown early in 2021, a stocks value depends on more than mere fundamentals, and recent weeks seem to indicate that meme stock fans arent done with AMC.