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In the ever-changing landscape of retail investing, few events have captured as much attention as the rise of meme stocks. A cinema chain AMC (NYSE: AMC) and game retailer GameStop (NYSE: GME) stands as the baby stock of this movement, but as we approach the end of 2024, is the story over?
Two hundred
Both companies fell well short of record highs in 2021. Retail investors were famously congregating to buy stocks, driving up the price, and resulting in sell orders causing some to hold short positions. This series of events is known as short compression. It led to a cycle of continued expansion, and eventually some controversial buying restrictions by brokerages.
AMC is down 32% year over year, but Gamestop is up 41% over the same period.
AMC's $8.7bn debt is growing, especially with interest rates close to a recent hike. Annual revenue is a healthy $4.49bn, with a gross margin of 12%, but with a net profit margin of -8.15%. Perhaps most alarming is the debt-to-equity ratio of -255.5%, which suggests significant financial challenges.
Looking ahead, the company predicts strong annual earnings growth of 46% over the next five years. However, as management continues to increase the number of shares outstanding, up 128% over the past year, debt and negative shareholder equity present significant risks.
With a market capitalization of $10.2bn and a price-to-sales (P/S) ratio of 2.1 times, Gamestop's valuation also appears stretched compared to traditional retail metrics.
The company's annual revenue stands at $4.92bn, with a net profit margin of 25.45% and a net profit margin of 0.51%. Although GameStop has turned a profit, analyst projections for annual profit to decline by 27.4% over the next three years raise concerns about sustainable growth. Whether the company can successfully transition from brick-and-mortar to e-commerce is unclear.
Is there still a chance?
So when evaluating these meme stocks, it's important to consider performance relative to industry peers and broader market trends. GameStop's price-to-book ratio of 4.9 times far exceeds value S&P 500 an average of 3.8 times, while AMCs are insignificant due to negative equity. Furthermore, beta values, which compare volatility to the broader market, have GameStop at 1.77, and AMC at 2.14, emphasizing that these stocks are not for the faint of heart.
Of course, both companies are pursuing strategic changes to adapt to market dynamics. GameStop's e-commerce pivot and AMC's digital initiatives could drive future growth. Broader economic factors, including inflation trends and consumer spending patterns, will have a major impact on these discretionary spending businesses. But we can't ignore the fact that events and community-led enthusiasm are the driving force behind these stocks' progress.
Since many investors still hold large short positions in these companies, both remain vulnerable to new short events. This presents opportunities for short-term traders, but significant risks for long-term investors. As a long-term fool, these are not risks I think I should take.
I'm not convinced
While the allure of meme stocks continues, I suggest that smart investors approach AMC and GameStop with caution. Consider these stocks as speculative positions within a diversified portfolio rather than primary assets.
So while companies like AMC and GameStop continue to attract more market share, long-term investment performance remains uncertain. I will be distancing myself.
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