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 Market Mysteries of the week

  What are “meme stocks” and what’s going on with AMC? 

Answer A lot of people are buying shares of movie theater company, AMC Entertainment, and AMC is cashing in on it.Remember Gamestop?In January, it was hard to find a news outlet that wasn’t talking about the stock of the failing video game store. Non-professional, or “retail”, investors were buying shares of Gamestop in massive numbers. It started within a Reddit trading blog community, then gained attention through other blogs and meme accounts. People started piling in, buying more shares, and the overwhelming demand pushed the stock price up dramatically. The buying was partly motivated by vengeance against professional, or “institutional”, investors like hedge funds that were betting the stock would go down, and partly by FOMO on potential trading profits. Now the attention has been refocused on AMC Entertainment, the struggling movie theater company.Is this bad?We never condone short-term trading strategies, because it’s extremely difficult to be successful. Hedge funds with supercomputers still struggle to consistently perform well, so please don’t think you can time the market perfectly and double your life savings based on a tweet or TikTok video.What we thought was cool about the Gamestop saga was the clear shift of power in the market. It’s clear retail investors can make an impact with their dollars. We’re not a drop in the bucket anymore. Retail investors now own over 80% of AMC.Investors piling into the same buying frenzy is not new. It’s just new to retail investors. Institutional investors just call it “momentum trading”. Hedge funds have supercomputers that track where investors are buying, buy more, then try to sell it before it drops to make a profit. Do I want to own AMC?Value is in the eye of the beholder, but it would be difficult to find someone with any investment experience who would not call AMC “overvalued”. That just means that most people would say the company is not worth what investors are paying for it.Investors usually value a stock by taking some measurable aspect of the company’s current performance, like its profits, then marking it up based on their confidence that the company will continue to deliver and grow those profits.There’s always an opinion on either side of every discussion, so the “right” price is always up for debate.What you can always do is look at the price relative to itself or to other companies. AMC is currently valued at roughly $24B. United Airlines is worth $18B. Domino’s Pizza is worth $17B. ViacomCBS is worth $27B. AMC was worth about $1.2B in June 2019. Is AMC really 20x more valuable now with $5B in debt, fewer movie goers, and more streaming competition?What happened this week?A lot. For whatever reason, the retail group has rallied behind AMC again this week. AMC is leaning into the demand for its stock and using it to their advantage.AMC sold new ownership shares to a hedge fund at the start of the week, earning them a fresh $230M of cash to help them stay alive. The hedge fund sold the stock immediately to make a nice profit.AMC started courting retail investors, providing them with a new way to communicate with the company’s investor relations, giving away free popcorn to shareholders (🍿lol), and flashing some skin (🤯) to the more avid fans.AMC issued more shares later in the week as the stock price stayed high, pulling in another $587M.How does the company make money from this?Companies earn cash by selling new slices of ownership, aka “issuing shares'', to public investors. The first time they do it, it’s called an Initial Public Offering (IPO).After the shares are out on the market, they don’t make money from it. When you buy a share of AMC, you’re buying it from another investor. That money doesn’t go to the company.AMC has now earned $1.25B this quarter by selling more of their company to the open market, taking advantage of the high value per share. Fair warningRaising money at a high valuation makes sense for the company, but not necessarily for the people buying. In this week’s issuance, AMC basically warned investors not to buy because the shares were likely to lose significant value. They did it anyway.Hertz, the rental company that went bankrupt last year, tried doing something similar, but the SEC stepped in to stop people from buying them. AMC is not bankrupt, but Hertz has been called the “original meme stock”.We hope that’s helpful context. To be clear, we are definitely not recommending any investment here. It’s nearly impossible to perfectly time short-term trading in general. Be safe and keep a long-term perspective.💙 The Scoop Team 

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