There’s an old gambling adage that the worst thing that can happen to first-time gamblers is to win. A whole new generation of investors bet big on AMC Entertainment (NYSE:AMC) stock in 2021. So far, they have hit the jackpot.
Unfortunately, the lessons these AMC stock investors have learned may end up doing more damage than good in the long-term.
AMC Stock Is A Pure Gamble
I try to keep things extremely simple when it comes to analyzing AMC stock. From what I can gather, the bull case for AMC is that investors see the company as a recovery play following the pandemic.
Young Americans still enjoy going to the movies. Streaming services like Netflix (NYSE:NFLX) will not make movie theaters obsolete the same way they made Blockbuster Video obsolete.
There is another part of the AMC bull thesis that involves driving out short sellers. Investors believe they are on the brink of a major short squeeze that will send the stock to the moon.
AMC’s short interest is currently about 18.7% of its float, according to ORTEX Analytics. While that number is relatively high, it’s nothing like the 130%-plus short interest that triggered the GameStop (NYSE:GME) short squeeze earlier this year.
I agree movie theaters aren’t going away. For now, it appears AMC has raised enough capital to avoid bankruptcy in the near term. But AMC was drowning in debt even before the pandemic.
From 2016 through 2019, AMC averaged a $103.6 million annual net loss. In the second quarter, AMC reported earnings and revenue beats. It also reported another $343 million net loss. Even if it fully recovers its pre-pandemic business, it will likely still be losing money and piling on more debt.
Buying a stock that is drowning in debt, dumping hundreds of millions of new shares into the market and losing hundreds of millions of dollars year after year is a pure gamble.
AMC Investments Probably Won’t End Well
If you are an AMC investor that has profited on the huge 2021 run, congratulations. Some people certainly recognized the groundswell of social media support for the stock. They predicted the big run and made a heck of a trade.
But I’m also seeing plenty of evidence based on online commentary surrounding AMC stock that many investors don’t fully understand what is actually going on.
Stansberry Research lead editor Dan Ferris says the stock market is currently in a massive speculative bubble. He uses AMC stock as a clear example of the type of blind market speculation that fuels stock market frenzies.
“Nobody buying AMC’s stock today has the slightest clue what they’re doing. Yet to the herd, it looks like it got things right on AMC…so they can’t imagine not getting it right,” Ferris says.
He says there’s no rational reason AMC should have a $20 billion market cap.
“Their stellar results so far – and the accompanying euphoric sentiment – have set these folks up for huge losses,” Ferris says.
Nobody is good at investing when they first start. You wouldn’t expect to be good at tennis or accounting or Fortnite the first time you try them. Investing is no different.
There is a clear learning curve on Wall Street, and that’s OK. All new investors make mistakes. What’s important is learning from those mistakes and getting better over time.
Investing in a money-losing company with a struggling business and expecting a turnaround is a common mistake of new investors. Typically, they take their hit, learn their lesson and avoid that mistake in the future.
In the case of AMC stock, the gamble paid off, at least initially. I’m concerned about what harmful lessons new investors might be learning from that win. I worry that they will pass over high-quality cash cow stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in favor of AMC and GameStop. Even worse, many of them may double down on their AMC bets using options or margin.
Like I said in the intro, I’m going to keep things very simple. If you are a new investor who has won on AMC, I’m not telling you to sell your whole stake. I’m not telling you AMC is going bankrupt.
But I will remind you of this fact. Two years ago, before the pandemic, AMC stock was trading at $11.40. There’s at least a very good chance it will go back to that level or lower at some point in the future.
On the date of publication, Wayne Duggan held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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. Mr. Duggan 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.