AMC keeping momentum regardless of excessive valuation

One of the main news in 2021 is the phenomenon of “memetic stocks” trading. Retail investors are working together to push up the prices of companies that are heavily shorted. The struggling movie theater company AMC Entertainment Holdings (AMC) has been one of the main stars of the movement. The stock price has climbed from a low single digit to $72 per share. Although everyone wants to make quick profits, investors should exit while the music is still playing. AMC is still in deep trouble, and management is desperately trying to raise cash through equity dilution. At the current level, AMC’s corporate value far exceeds its peak valuation in recent years. This will not end well

AMC’s stock price has soared from the “short squeeze” that has occurred in recent months. In the past year, the stock has risen 600% to 900% at a high of more than $70 per share. Rapid (upward) stock price fluctuations can cause a frenzy of excitement, which is human nature, and investors continue to pour into stocks. Under these high prices, the overall corporate value of AMC is also climbing. In its history as a public company, AMC has never reached an enterprise value of $10 billion before the “memetic stock” boom. Today, the enterprise value is 26 billion U.S. dollars.

But what about AMC as a reopened game? Retail investors may not realize the impact of dilution on stock returns. When a company raises funds by issuing shares, it is the same as a slice cut into small pieces. The value of each investor’s share is lower because there are more slices in the pie. Due to the aggressive pace of AMC’s issuance of shares, the degree of dilution is high, and in the event of a business rebound, the opportunities for shareholders to obtain meaningful returns have been weakened. Analysts expect that as consumers return to movie theaters in the next few years, AMC’s business will rebound. It is estimated that by 2023, revenue will reach 5.19 billion U.S. dollars. However, this does not guarantee a happy ending for investors.

AMC’s valuation cannot be supported by its business fundamentals. Like a musical chair game, the music will eventually stop. When the momentum that pushed AMC higher finally turns, there will be no fundamental force to support the return of stock prices to reality. Although I do not participate in “memetic stocks”, I recommend that all investors use them with caution. After the show, you don’t want to be the one who turns off the lights.

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