Please ensure Javascript is enabled for purposes of website accessibility

AMC Stock: Why the Theater Chain Is No GameStop

By Rich Duprey - Jan 30, 2021 at 5:55AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These are two vastly different companies in very different situations.

Shares of AMC Entertainment (AMC 17.99%) plummeted 57% yesterday, a big setback to a week that had seen a short squeeze send the stock soaring over 800%. Similarly, GameStop (GME 6.81%) tumbled 44%, ending a multi-day rally that had allowed to quadruple in value.

But with a number of stock brokerages imposing limits on trading the stock -- or preventing investors from buying the stock outright -- it wasn't a surprise to see them fall. Still, even though both stocks are off to the races again today, GameStop has momentum where AMC Entertainment does not, and there are several good reasons for this, mostly because AMC is no GameStop.

Red arrow trending down over hundred dollar bills

Image source: Getty Images.

A virtuous circle

While there has always been tension between short-sellers and investors who are long holders of a stock, the recent battle of wills began when some investors on Reddit noticed hedge funds had placed enormous bets that GameStop's stock price would fall.

They banded together and began buying out-of-the-money stock options, which caused the option sellers to buy shares of the underlying stock to reduce their risk, which had the effect of raising GameStop's stock price. That encouraged more investors to buy more stock options, and the option sellers had to buy more GameStop stock, sending the retailer's share price rocketing higher as the cycle continued.

Short-sellers are being bludgeoned by the price action, but there's little they can do about it.

Short of time and money

To sell a stock short, investors actually borrow shares from a market maker who sells the shares on the market for them. Based on a belief the price will go lower, the investors will buy them back later and pocket the difference. It's the same concept as a regular trade, only conducted in reverse.

In GameStop's case, short-sellers had actually sold short well over 100% worth of the video game retailer's float (that's the amount of stock actually available for trading), which means there isn't enough of the underlying stock available for them to cover their short position.

They can only sit and watch in horror as the stock price rises and their short position hemorrhages deeper losses. There's been a suggestion that GameStop could issue more stock at vastly inflated prices, which would take the pressure off the short-sellers while lining its own pockets with potentially billions of dollars. 

GameStop hasn't indicated it intends to do anything like that, but that's not something available to AMC Entertainment -- and it's one reason why the theater operator's stock is tumbling while the video game retailer rises.

Pulling the plug

While there's a dearth of GameStop stock, there's plenty of AMC stock to go around. Make no mistake, as of Jan. 15, some 38% of the theater owner's stock was sold short. That's a significant amount, but its short interest ratio was just about 1.2 days, which is the amount of time it would take for short-sellers to cover their position.

With anything over seven days considered a lot, it is still relatively easy for short-sellers to unwind their position and cover it to stem the bleeding. 

Unlike GameStop, there's no continuous upward pressure on its shares, and that goes for a number of other stocks that have also seen their stock price benefit from a short squeeze.

A tale of two shorts

GameStop's stock can still fall back even if it doesn't issue more shares, particularly as attempts are being made to thwart the coordination of retail investors in buying the retailer's stock.

But with the fundamental operations of AMC Entertainment and GameStop being completely different, their financial situations diverging, and the structural impediments of how their stocks are sold short, it's easy to see why the theater owner is crashing while GameStop still has the ability to climb.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$137.21 (6.81%) $8.75
SunPower Corporation Stock Quote
SunPower Corporation
$18.19 (6.81%) $1.16
Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
$9.23 (8.08%) $0.69
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$14.43 (17.99%) $2.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.