Buy AMC stock - Commission-free

AMC (American Multi-Cinema) Entertainment Holdings Incorporated is currently the largest movie theatre chain in the world and a quintessential part of American entertainment history. Its legacy dates back to the 1920s when the Durwood family purchased the Regent Theatre in Kansas City, Missouri. The theatre chain included 10 premises by 1961 when father of the family, Ed, passed away and his son Stanley took over management. Seeking to optimise profit, Stanley was pioneering in his adoption of the multiplex theatre model, which would later become an industry standard.  Multiplex theatres allowed for multiple simultaneous screenings in separate rooms to be operated and maintained by the same number of staff, this lowered operational cost per theatre while significantly increasing profit.

The AMC chain recorded consistent growth over the years leading to their initial public offering in 1983 which funded the expansion of the chain to Canada and Europe. The multiplex model proved the profitability that came with economies of scale, thus the logical next step for the chain was to create the megaplex. In 1995, AMC opened the first North American megaplex theatre in Dallas, Texas which could accommodate over a thousand movie-goers. The chain continued its expansion and growth throughout the 2000s. It was acquired by the private equity arm of JP Morgan Chase in 2004 before being sold 8 years later in 2012 to the Chinese conglomerate Wanda Group for approximately $2.6 billion. At this point, AMC had grown to 347 theatres across the US and Canada. During the latter half of the 2010s, concerns over the sustainability of the theatre business model in an era of online streaming began seriously affecting its share price.

Since 2016, the AMC share price recorded significant average annual declines, dropping from an average annual share price of $28.74 in 2016 to $11.77 in 2019. It seemed to all be over for the legendary theatre chain with the advent of the Covid-19 pandemic and subsequent lockdowns. Hedge funds had placed their short position bets and one could imagine them cackling like anticipatory hyenas waiting to pick off the scraps of failing businesses, when a deus ex machina of the most unexpected kind made its appearance. Enter r/WallStreetBets.

The past week has seen a frenzy in the financial markets, as hedge funds scramble to avoid bankruptcy after their attempts at shorting stocks blew up in spectacular fashion. A financial investment/trading community on Reddit called WallStreetBets, or WSB, coordinated the pooling of resources and mass purchase of struggling stocks such as GameStop, AMC, Blackberry and others. These stocks had one thing in common -they were being massively over-shorted by hedge funds.

Shorting is an investment strategy in which a trader ‘borrows’ a share from a broker and immediately sells it, hoping that share price will decrease in the near future, at which point the investor can buy the share at the now cheaper price and return the ‘borrowed’ share to the broker thus profiting from the price change. This is an extremely risky trade strategy. With normal trades, the worst case scenario is losing the money you put in. In a short position, you are betting against the stock and therefore face infinite down-side risk as there is no limit to how high a price can go. This is exactly the problem that US hedge funds like Melvin Capital faced last week when their over shorted positions were revealed on Reddit.

Traders on the WSB platform recognised an opportunity to simultaneously punish major hedge funds for their reckless trading strategies and, ironically, profit from their downfall. WSB had to coordinate carefully as their strategy depended on culminating in maintaining a critical mass of buying power that would drive up the share prices of multiple overly-shorted stocks. This counter-strategy is often referred to as a ‘short-squeeze’, as the traders betting against the stock are ‘squeezed’ out of their short positions by rising share price pressures. 

Over-shorted stocks, as was the case with GameStop and AMC last week, puts additional upward price pressure in a short-squeeze as more shares have been ‘borrowed’ than are available in circulation. This sent hedge funds into a panic as they bid up share prices to extreme new all-time-highs to secure their trade and close their position. The short-squeeze was successful and by Thursday the highest-profile hedge fund, Melvin, was bailed out for $2.2 billion dollars.

Our financial experts here at nextmarkets have advised extreme caution for any trader or investor who is considering buying AMC stock or any of the stocks that have been branded as ‘meme stocks’ by the media. The dramatic rise in the AMC share is a function of orchestrated price manipulation of online traders and not an appreciation in value of the underlying asset. We are not making any judgement call on the efficacy of this practice, however, such high volatility should raise red flags for investors hoping to minimise risks. Stocks that record consistent long term growth are generally much safer bets especially for new investors. Any sharp spike in the price of a stock should be associated with an announcement that has a material benefit for the company.

Not only has the AMC share price been on the decline for the past four years but the fundamentals that drove that depreciation, failure to innovate and losing out to online streaming, have not been resolved. The theatre industry is waning in attendance and the malls in which it operates have been dealt a deadly blow by the pandemic. AMC had little over 105 million shares by the third quarter of 2020 and has since sold an additional 290 million shares to avoid bankruptcy. This dilution means AMC has to generate 4 times as much profit as it did pre-Covid for the share to be of commensurate value. Furthermore, AMC is sitting on a mountain of debt which necessitates annual interest payments larger than their annual income.

Considering these facts,  should you buy AMC stock? Our team of financial analysts do not advise the purchase of AMC stock and predict further stock price depreciation long term. As always, we encourage you, our reader, to do your own research and to make the investment decision that best suits your personal needs. Always remember, no share price is ever guaranteed to rise or fall and therefore it is extremely risky to invest money you cannot afford to lose.

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Start trading with Nexmarkets within minutes. All you need is a mobile device, internet connectivity and some disposable income to start trading commission-free with nextmarkets, Europe’s top online broker. The process is simple. The first step is to create an account, provided you are over 18, through our website or on our award-winning mobile app by entering your email and choosing a password. Next, you need to provide personal data and identification for KYC (know your customer) regulatory purposes, share your level of experience so we can make our services bespoke to your needs and confirm! You are now ready to start trading.

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The pandemonium on Wall Street last week has caused a frenzy among online traders and investors who are now reassessing the potential of ‘meme stocks’ like AMC. Our experts here at nextmarkets advise strongly against buying AMC stock as the company is likely to further dilute its shares in the near future to avoid bankruptcy and is unlikely to meet the interest payments on its exorbitant debt. AMC and the cinema industry at large is in decline, post-pandemic will likely see a boost in attendance but the damage is done and the long term prospects for AMC are dim.