At the start of the year, we saw an extraordinary move in shares of GameStop (NYSE: GME). GameStop is a video game retailer with significant challenges such as video games increasingly being bought through downloads and the cost and expense associated with running thousands of retail locations. Therefore, many believed the company was in a slow-motion spiral lower, leading to many funds building massive short positions in the stock.
This drew the interest of traders on Reddit's r/WallStreetBets who started bidding up shares in an effort to engineer a short squeeze. At the same time, there were some positive developments for GameStop including a sharp uptick in revenues as the pandemic led to increased spending on video games and another console cycle which were still predominantly sold in stores. It culminated in shares rising from $19 to a high of $489 in January. Many other companies with smaller floats also saw big gains in a short period of time.
Round 2
While many dismissed this as a one-time occurrence, it's increasingly clear that something bigger is afoot especially as we are seeing Round 2 of Redditers bidding up stocks to unthinkable levels. The most notable example is AMC (NYSE: AMC) which is up from under $10 to a high of $70 in less than a month. Of course, just like GameStop, this valuation goes beyond any rational reason.
This price gives AMC a valuation of around $26 billion which is higher than anytime in its history. Even prior to the pandemic, AMC was struggling as it lost money in 2019, and there has been tremendous consolidation in the movie theatre space. Longer-term, there is cause for concern as people's upgraded home viewing experience means there is less demand to go to movie theatres. Additionally, there are many more options for entertainment than before. And, many studios are experimenting with releasing films direct to consumers or on their streaming platforms.
What's Next?
AMC has been savvy in using its inflated share price to issue more shares and has raised more than $2 billion in cash. This should give it money to survive lean times and hopefully invest in developing new sources of revenue. As the economy returns to normal, we could see improved financials as there will be some pent-up demand to watch movies in theatres, however, this doesn't meaningfully affect the company's long-term fortunes.
In a more strategic sense, investors and traders should respect the power of short squeezes and social media to cause stocks to spike to extraordinary heights. One interesting item is that many Redditers are starting to build a movement to squeeze silver prices. This is worth monitoring as many silver miners are trading at attractive prices.