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Will the AMC stock meme rally be short-lived?

AMC stock: AMC movie theatre

The AMC Entertainment [AMC] stock price spiked during trading on 25 August, jumping more than 20% and reaching an intraday high of $48.30 – its highest price since 9 July. 

While the AMC stock price pulled back over the next couple of days, it went on to close at $47.13 on 31 August, its highest level since 8 July. The sudden uptick shows that there could be plenty of volatility in the stock, and its box-office run this year – which has seen it rise by a colossal 2,123% – may not be over just yet. 

What’s behind the AMC stock’s recent spike?

According to data from Yahoo Finance, 25.24% of shares are held by institutions, and 0.32% are held by insiders. This means 74.44% of shares are owned by retail investors. 

As explained by The Street’s ‘Wall Street Memes’ channel: “A company whose ownership is widely distributed across the general public, as is the case of AMC Entertainment, can benefit in a couple of ways.”

The analysis highlights the recent rally against CEO Adam Aron’s plan to sell 25mnew shares. Investors vetoed the issuance simply because they feared it would drive down the share price. According to ‘Wall Street Memes’: “Were AMC primarily owned by only a few, the polling would have likely not even taken place.” 

To this end, it’s possible that retail investors are in a position to help prop up AMC stock. The recent spike in the share price could be another short squeeze — fellow meme stock GameStop [GME] also jumped around 35% during trading on 24 August.

The timing would make sense, considering recent market calls. Renowned short seller Jim Chanos has been vocal about meme stocks in the last month. He took aim at AMC day traders, in particular, and told CNBC that “there’s no way [AMC] can be profitable”.

Financials in poor shape

Though the recent spike in the AMC stock could be an indication that retail investors are fighting back against short sellers like Chanos once more, it doesn’t take away from the company’s precarious financials. 

AMC surprised the market with its most recent quarterly report, posting an earnings beat and a narrower-than-expected loss, but the balance sheet remains lumbered with billions of dollars of debt. 

Aron said on the second-quarter earnings call: “AMC’s journey through this pandemic is not finished, and we are not yet out of the woods.”

The cinema business model was crushed by the pandemic. AMC was in such a state at the end of 2020 that it was on the brink of bankruptcy and only avoided it thanks to a $917m fundraising effort in January this year.

Even as theatres reopen, some cinema-goers are choosing to stay away, and some distributors are either delaying releases or pushing them straight to streaming platforms. Ticket sales are still well below pre-pandemic levels. The question for AMC is how it will navigate this tricky period and lower its debt without issuing more shares and diluting the stock. 

Retail investors may continue to prop up the AMC stock in the meantime, but based on the fundamentals, there could be some downside for the share price in the long term.

In the last eight months, the share price had gone from a record low of $1.91 to a record high of $72, before falling back to levels close to its previous peaks in 2016, when its finances were in much better shape.”

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