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What was behind recent buying frenzy in GameStop and AMC stocks?

The GameStop [GME] and AMC Entertainment [AMC] stocks both leapt higher last on 24 August, recording double-digit percentage hikes, as a fresh rally in meme stocks got underway. In contrast, the S&P 500 closed the same trading session just 0.2% higher. 

The stock prices of videogame retailer GameStop and cinema chain AMC Entertainment continued to extend their rise throughout the week to the close, ending the week up 26.2% and 16.2%, respectively. In comparison, a close to 1% rise on 27 August helped the S&P 500 to finish the week up 1.33%. 

What sparked the sudden bullish sentiment on these two well-known meme favourites? Were there any fundamental or technical factors behind the share price hikes, and what’s next for the GameStop and AMC Entertainment stocks?

 

What’s happening with GameStop [GME] stock?

The GameStop stock jumped as high as 36.4% during intraday trading to as high as $225.00 on 24 August, before closing the day up 27.5% at $210.29. In the previous four weeks, shares in the retailer declined by more than 10%. 

The surge was driven by high retail trader activity. CNBC reported that “more than 14 million shares changed hands, seven times more than its 30-day average”. The GameStop stock price maintained a high level of trading volume throughout the rest of the week, climbing 26.2% to $204.95. As of 27 August’s close, GameStop stock was up a mind-blowing 2,968.11% over the last 12 months and 1,088.12% in the year to date. 

Earlier this year, the GameStop stock was languishing at a low of $17.25 in January – although it was still higher than its July 2020 low of $3.77. At that time, the firm had been attempting to convince shareholders and the wider market that it had a viable turnaround plan. In the extreme volatility caused by the retail investor-fuelled short squeeze at the end of January, the shares soared as high as $483.00. They've since been on a rollercoaster ride, sliding back to $38.50 in February and jumping again to $300 in June. 

The social media frenzy has drastically cut the short interest in GameStop, “from more than 100% in January at the height of the meme stock mania” reports CNBC, to about 10.18% today, according to The Motley Fool.

 

What’s happening with AMC Entertainment [AMC] stock?

AMC Entertainment stock was also caught up in the meme rally, which kick-started last 24 August, jumping 20.34% on the day to close at $44.26. Like GameStop, the AMC Entertainment stock largely maintained its rise, closing the week up 16.22% at $40.84. The US movie theatre’s share price has leapt by 1,931.84% year to date. 

“#AMCSqueeze” was one of Twitter’s top trending terms on 27 August, “suggesting the gains were part of a bigger, concerted effort to frighten short-sellers of the stock out of their trades, thereby fueling even more gains”, reported James Brumley in The Motley Fool

AMC Entertainment stock may also have been boosted by the US Food and Drug Administration (FDA) approval of the COVID-19 vaccine developed by Pfizer [PFE] and BioNTech [BNTX]. While the announcement may have helped investor sentiment, “we mustn’t look past the fact that some traders leveraged the FDA’s decision to spark another short squeeze for this meme stock”, suggests Brumley. The success of the new Disney film, Free Guy, which generated over $20m in US and Canadian cinemas on its opening weekend, may have also offered a boost to AMC Entertainment stock, said CMC Markets’ Michael Hewson.

 

GameStop set to report improved figures 

The share price surges have enabled these beleaguered companies to raise new funds through share issues, helping to fund turnaround plans. GameStop is attempting to transform its business, according to Zacks Equity Research, “with investments toward boosting omnichannel capabilities and enhancing fulfillment capabilities such as the rollout of the same-day delivery option as well as several flexible payment options”.

With GameStop due to unveil its second quarter results on 8 September, investors will be keen to know whether its plans can “begin to justify the share price”, reports The Motley Fool’s Howard Smith. The retailer is expected to post a quarterly loss of $0.42 per share, according to Zacks, which, while on the face of it doesn’t look positive, would represent a year-on-year improvement of 70%. Revenue is expected to come in at $1.12bn, which would be an 18.7% year-on-year rise.

 

Investors hope AMC stock benefits from FDA approval 

AMC Entertainment’s stock could be yet hampered by a combination of vaccine hesitancy and movie streaming, with ticket sales “running at about half what they were before COVID-19”, according to Brumley. One reason for this is likely to be that more movie fans are watching new releases at home rather than on the big screen, with studios apparently happy to make the home-viewing option available while cinema-going remains impacted. 

However, FDA approval of the COVID-19 vaccine could mark a turning point. AMC Entertainment stockholders will be hoping that now the vaccine has successfully passed the FDA’s drug approval process, more people will feel comfortable being vaccinated, and this, in turn, could boost customer numbers.

 

What’s next for GameStop and AMC Entertainment stocks?

Analysts’ average 12-month price target on GameStop stock is $72.50, predicting that the stock has a possible downside of 64.63% from its 27 August close, according to The Wall Street Journal. With two hold and sell ratings, GameStop has a consensus underweight rating. 

The average 12-month price target for AMC Entertainment stock is $5.44, with The Wall Street Journal suggesting the shares have a possible downside of 86.68% based on the 27 August close. With five hold and four sell ratings, analysts covering the AMC Entertainment stock also rate the stock a consensus underweight. 

With both these businesses still having a distance to travel to complete a successful turnaround, and analysts suggesting there’s further downside potential based on fundamentals, there could be more volatility ahead for these two meme stocks.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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