AMC (NYSE:AMC) stock has had a roller coaster year so far. Shares of the movie theatre giant and GameStop (NYSE:GME) are favorites of Reddit. And there are no signs that will change, considering we are entering a busy summer movie season.
But should you forgo fundamentals when analyzing this company? Well, again, it depends on what kind of trader you are. In case you value a long-term investment strategy, then it’s better to go ahead and take your profits before the ball drops. But considering the short-term catalysts ahead, there is still money to be made on AMC stock.
I believe in taking the long-term approach and avoiding any pitfalls along the way. There are potentially higher rewards for being patient for a longer period of time.
Though AMC stock will not benefit much from sales figures, the company itself could use better-than-expected demand after about a year of state, local, and territorial travel restrictions. Data from traffic analytics platform Placer.ai reveals AMC locations saw foot traffic jump 79% week-over-week during the fourth week of May and 159% week-over-week during the first week of June.
In May, foot traffic in AMC locations was down 68% from May 2019, which was an improvement from a 70% decline in April and a 76.3% decline in March. So, it’s not all doom and gloom for AMC. But is it enough to justify a market cap of $29.25 billion and a price-to-sales of 24.8 times? Not a chance.
AMC Stock Will Rise as Customers Keep Returning
AMC stock has been cooling off. However, not fast enough for the bears. Shares are still up 364.5% in the last month. That kind of momentum is unheard of, but we are living in the age of meme stocks.
Meme stocks often see their share prices skyrocket not because of underlying value. Instead, investors on social media decide they want to see the shares go up. Of course, that doesn’t mean they are all bad investments. In fact, several Reddit stock picks are sound investments. But the overarching issue remains the same. The main reason for investment is not fundamental analysis.
Having said that, it’s important to highlight the short-term catalysts that can keep the stock going up despite lackluster earnings.
Chief among these reasons is the return of customers to movie theatres after almost one year.
On Memorial Day weekend, American movie theaters roared back to life, increasing hopes that the cinema industry will make a comeback after a brutal year. According to a Fandango.com survey, 93% of ticket buyers are satisfied with their returns to movie theaters, with 87% believing the theaters’ have done a great job making them feel safe after the pandemic.
These are important statistics, and the holiday box office receipts will bring much-needed relief to studio executives. Unfortunately, the data will also lead to short-term spikes for AMC stock because Redditors will use any positive news to reinforce their ‘diamond hands’ narrative.
Financial Muscle
AMC management deserves credit where it’s due. It has made hay while the sun shines, increasing its outstanding share count to more than 500 million from over 200 million at the start of the year.
And the company is not done yet. At the July 29 annual meeting, a proposal will be tabled to authorize an additional 25 million new shares.
“To successfully navigate the road ahead, we seek to assemble all of the financial tools that might help us,” Chief Executive Officer Adam Aron said in a statement. “An important tool for any company is having shares available to issue.”
Again, you cannot fault the company for taking advantage of the skyrocketing price. The new capital that the company has accumulated gives it a lot of leverage to pursue multiple strategies.
With the new capital in tow, AMC’s CEO Adam Aron said the ailing movie-theater chain is looking into several acquisitions, including buying ArcLight and Pacific theaters that will not reopen after the pandemic. In addition, the company will also look into paring some of its $5 billion in debt, decreasing its interest costs, and paying millions in unpaid rent.
But surely, at some point, investors will get tired of all this dilution. However, that is the thing. As the two charts above show you, the share price has increased regardless of abysmal earnings and massive stock sales.
Do Not Invest Money You Cannot Afford to Lose
Can money be made through investing in AMC stock? Yes, that is is perhaps unsurprising for a company that’s become the king of meme stocks. The larger issue concerns when the bubble will burst.
Beyond AMC’s improved liquidity position, there are not many reasons to remain optimistic. Even AMC thinks its stock is overvalued and has warned investors, according to an SEC filing.
“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” AMC said in the filing. “Under the circumstances, we caution you against investing in our class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
So, you have heard it from the horse’s mouth. The rapid and substantial price spikes and falls are not for the faint of heart. But the upcoming summer box office season will provide retail traders with many opportunities to make short-term profits.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
