About six weeks ago, I wrote about how GameStop (NYSE:GME) might be a fun stock to trade, but long-term investors should avoid it. Since that story, r/WallStreetBets favorite AMC Entertainment (NYSE:AMC) stock has gained 51.6%. I thought now would be a good time to compare and contrast GameStop and AMC.
I also wanted to take a closer look at whether or not there’s a compelling case to buy AMC stock.
AMC Stock Fundamentals
When it comes to fundamentals, there’s one major difference between GME stock and AMC stock. There’s no question both the movie theater business and the brick-and-mortar retail business were crushed during the pandemic. But GameStop’s business was struggling even prior to the health crisis. GameStop’s revenue has been in steady decline since it peaked way back in 2012. In fact, in 2019, GameStop’s revenue was down 3% and it reported a net loss of $673 million.
AMC’s revenue, on the other hand, roughly doubled from 2010 through 2019. Revenue growth was minimal in 2019 at just 0.2%, but growth is growth.
The bigger problem for AMC is profitability. The company reported a $149 million net loss in 2019. Again, these numbers are from before the pandemic. In fact, AMC averaged a $103.6 million annual net loss from 2016 through 2019. It would be different if the company were a high-growth tech stock that hadn’t reached profitability yet. So there’s no question AMC’s underlying business is very challenged.
But the biggest red flag for any potential investor is the company’s ballooning share count. From 2010 to 2020, AMC’s outstanding share count increased by 9.6%. Since the beginning of 2020, it has exploded higher by 333.5%.
AMC reported a net loss of $4.6 billion in 2020. To stay afloat, the company has been dumping new shares of stock into the market. You can’t fault a company for doing what it must to survive a crisis. But the aggressive dilution has certainly changed the value proposition for AMC stock.
Short Squeeze Potential
Like GameStop, WallStreetBets chose AMC to pump because of its large short position. AMC currently has about 19.4% of its float held short, according to Finviz. That number is in the ballpark of GME stock, which has about 26.2% of its float held short. However, AMC’s float is massive compared to GameStop’s. After all the dilution, AMC’s float is now 285 million shares compared to just 54 million for GameStop.
Float is extremely important in the short squeeze recipe. Short squeezes are fueled by a lack of liquidity. When a stock with a low float begins to spike, there are very few shares available to borrow. Short sellers are forced out of their positions, and new short sellers have no way of entering the stock by borrowing shares.
I’m sure AMC will continue to experience WalStreetBets-driven volatility in the near-term. However, AMC stock likely doesn’t have anything close to the short squeeze potential of GME stock simply because of its massive float.
Finally Bank of America said last week that an end to stimulus payments might weigh on so-called “meme stocks” like AMC stock and GameStop. Posters have bragged for months about “YOLOing” their “stimmy” into meme stocks like AMC. It seems unlikely at this point there will be another round of stimulus payments for young investors to YOLO any time soon. That could certainly take some of the air out of the AMC stock balloon in the near-term.
How To Play It
Since the end of 2019, AMC’s share count has more than quadrupled. Its business has lost $4.6 billion. Its difficult long-term revenue growth and profitability outlook hasn’t changed. But somehow, AMC stock is up 87% in that time. You don’t have to be an equity analyst to see AMC stock doesn’t pass the smell test.
CFRA analyst Tuna Amobi says AMC’s business model may also be under even more pressure in the future.
“The major studios are tinkering with alternate release patterns that could permanently undercut the theatrical distribution window,” Amobi says.
CFRA has a “sell” rating and $2.50 price target for AMC stock.
I have not said that AMC will go bankrupt, that AMC stock is worthless or that the movie theater model is doomed. I don’t believe movie theaters are going away anytime soon. In fact, the business will likely see a huge rebound in 2021 thanks to pent-up demand. But in the long-term, AMC may be forced to follow the route of retailers like Macy’s (NYSE:M), Gap (NYSE:GPS) and, yes, GameStop and try to shrink its way to success by shuttering its least profitable locations.
AMC stock was not an attractive long-term investment heading into 2020. Today, the company is in a much worse position. One share of stock now represents 75% less ownership thanks to dilution. And somehow, the stock is 83% more expensive. I wish all the market speculators, gamblers, YOLOers and short-term volatility traders the best of luck. But serious long-term investors should stay away from AMC stock.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.