A cinema group buying a metals mining company? It doesn't seem to make sense, but things don’t always have to in the world of meme stocks. The key question analysts are now puzzling over is whether these investors will be sticking around for the company's growth strategy to materialise, or if they're just being drawn in by eyebrow raising headlines.
The past year has been a wild ride for AMC Entertainment Holdings [AMC].
Though up 118.2% from its low of $8.31 recorded on 13 April 2021, its current $18.13 share price is still 75% down from its all-time of $72.62 — which it recorded on 2 June 2021, less than two months after its low.
The stock popped once again in mid-March after the company announced it had invested $27.9m in Hycroft Mining [HYMC] at a price of $1.07 per share, taking a roughly 22% stake.
It’s early days, but the investment seems to be paying off. The Hycroft Mining share price closed on 11 April at $2.21, up 259.9% in the year-to-date. It reached a 2022 high of $3.10 at the end of March as news of the deal triggered a gold rush among meme stock investors.
Right out of left-field
While the initial movement of the Hycroft Mining share price suggests the investment could pay off, the acquisition of a precious metals development company seems like a strange decision for a cinema chain that posted a loss of $134.4m for the three months to the end of December.
The Hycroft acquisition could be an attempt to help boost the beleaguered business’s balance sheet. AMC CEO Adam Aron (pictured above) used the Q4 2021 earnings call to announce a wider restructuring plan, including a push into cryptocurrencies and non-fungible tokens.
Aron said: "I'd like to think there will be more third-party external [mergers and acquisitions] announcements going forward where AMC can reach for the stars and intriguing investments that have potentially attractive returns,” reported Reuters.
The synergy with Hycroft lay in AMC’s competency to understand balance sheets, raising funds, and solving liquidity problems, Aron added.
Bloomberg columnist Matt Levine commented in his analysis of the AMC-Hycroft tie-up: “AMC stock is in some sense an ownership share in a chain of movie theatres but in another sense it’s a financial instrument that reflects [Aron’s] ability to do funny stuff that attracts attention and delights people online.”
He added that the gyrations of the AMC stock have little to do with sales of movie tickets, and more to do with retail investor excitement over headline grabbing moves.
Retail trader sentiment has – for now – might have waned. Following the initial pop of the AMC share price, the stock has since pulled back sharply.
Analysts struggle to see the logic
The continued support of meme stock investors and the money they can put behind AMC’s strategy will arguably be crucial if the company is to make any future acquisitions a success.
While the Hycroft move can be considered a gamble that has raised eyebrows – and some concerns, too – there are some analysts that have found positives. B. Riley Securities senior analyst Eric Wold told CNBC that the acquisition could enable AMC to open up future growth opportunities.
“While this is definitely a surprise move by AMC, my initial and early take is that I can understand the rationale of the AMC board somewhat in their decision,” said Wold.
“After the AMC board was able to navigate through the pandemic lows and avoid bankruptcy, the impressive cash balance and strengthened balance sheet outlook gives the company an opportunity to diversify away from the theatrical industry.”
Despite the logic that might be behind the Hycroft acquisition, analysts remain largely bearish on the stock, which currently has three sell ratings and one hold, according to MarketBeat data. The consensus target for the AMC share price is $9.83, which implies a 46% downside from the 11 April closing price.