GameStop (GME 3.01%) and AMC Entertainment Holdings (AMC 3.67%) are being paired together by investors like the salt and pepper shaker on your dining table. Over the last several months, the two consumer stocks are experiencing gut-wrenching price movement. The stocks have increased or decreased by 50% or more in a single day more than a few times. Normally, an up or down move of that magnitude is a rare event.
GameStop and AMC are in different lines of business. GameStop is a video game retailer that specializes in offering customers the ability to buy and sell used games. In comparison, AMC is in the business of bringing people together in one of its over 1,000 movie-theatres to watch box-office attractions on a big screen with the latest technology. But their stock prices are experiencing similar volatility.
So what does a video game retailer have in common with a movie-theatre chain?
GameStop has become a popular meme stock. Image source: Getty Images.
1. A buying frenzy fueled by a Reddit group
Most famously, GameStop and AMC are part of a buying frenzy induced by a discussion on a Reddit forum r/WallStreeBets. The group has been targeting stocks that have a high percentage of their stock sold short. Short-selling allows you to profit if the price of the stock goes down, and the Reddit group's aim is to perform a short-squeeze. This creates a heavy buying momentum to overwhelm short-sellers and force them to close their short positions -- leading to a spike in the stock price.
The strategy appears to be working as both stocks are up by large sums since the buying began several months ago, even though their business prospects have not improved enough to justify the price increases.
Seats at AMC movie-theatres were empty for several months. Image source: Getty Images.
2. Negatively impacted by the outbreak of COVID-19
At the onset of the COVID-19 pandemic GameStop and AMC each had to close all of their locations to in-person customers. Fortunately for GameStop, it has a thriving e-commerce business that offsets some of the losses from the lack of in-person customers. AMC had no such fortune. All its locations had to close, and without any offsetting business, the theatre chain started bleeding cash.
However, the number of people getting infected, hospitalized, and dying from COVID-19 is decreasing worldwide. And with over 90 million doses of vaccine administered to people in the U.S., states are starting to relax restrictions on businesses. In fact, New York announced that it would allow movie-theatres to reopen (with limited capacity). California is going to allow theme parks and some sports stadiums to reopen. And Texas announced that it is removing all restrictions on businesses as of March 6.
GameStop and AMC suffered losses in revenue and earnings as the coronavirus ravaged businesses and livelihoods. The video game retailer and movie-theatre chain can now share cautious optimism that their businesses can return to some semblance of normalcy as the world bounces back from the devastating virus.
Still, the pandemic will leave a lasting impact on both. Studios like Disney (DIS +0.15%) are simultaneously or exclusively releasing new blockbuster films on a streaming platform, which could reduce movie-going. And video game makers are shifting sales of games to digital channels, which reduces the need to visit a brick-and-mortar retailer like GameStop. If you are looking to increase your wealth in the long term, there are better stocks than GameStop or AMC.
