GameStop (GME 1.07%) and AMC Entertainment Holdings (AMC 8.22%) are caught up in a frenzy of trading activity largely unrelated to their fundamental prospects. However, the $1.9 trillion stimulus package signed into law by President Biden could improve their near-term outlooks.
That's because the bill includes substantial funds going directly to individuals: up to $1,400 in one-time payments, a $300 weekly boost to unemployment recipients, and a $1,000 increase for the child tax credit. That money can go a long way at AMC movie theaters or GameStop stores as consumers look to spend their stimulus checks.
The increase in disposable income comes just as the risk of COVID-19 wanes nationwide. The vaccination rollout is speeding up, while the number of people testing positive for the coronavirus is trending down. That combination also has the potential to boost revenue at GameStop and AMC in 2021.
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Decreasing coronavirus infections across the U.S. are allowing states to ease restrictions on businesses. AMC is already in the process of reopening its theaters and welcoming moviegoers in big markets like New York City and Los Angeles. Film studios, in anticipation of these markets reopening, will finally start to release the blockbuster films they've been saving for the big screen.
Moreover, millions of people have been cooped up for over a year, and there's pent-up demand for entertainment outside the confines of their homes. With more money in their pockets thanks to the stimulus, they may be more inclined to splurge on popcorn and soda at the concession counter, boosting a key profit driver for the theater chain.
Gamers will have money to spend on next-gen consoles
Revenue was decreasing at GameStop even before the pandemic's onset forced the retailer to temporarily close its approximately 5,000 locations. Gamers are increasingly turning to digital purchases, which saves publishers the cost of packaging and shipping (not to mention the increased engagement and data collection), so consumers have less of a need to visit their local GameStop location. However, for years, the video game retailer has relied on one major advantage -- its used games business.
Since digital games are usually priced the same as physical versions, many gamers prefer to have that hard copy that they can eventually trade in towards other titles. That dynamic should keep GameStop afloat for at least a few more years, buying the company enough time to properly transition to the digital age.
Sony and Microsoft's launches of their next-generation consoles last year are also a source of optimism. Several months since the PlayStation 5 and Xbox Series X hit store shelves, the consoles are still regularly sold out at large retailers. Eventually, however, the supply will increase to meet the outsized demand, and with the stimulus checks arriving as soon as this week, demand could increase even further.
GameStop has an opportunity to generate revenue from both the new console sales, in addition to any corresponding game purchases.
What this could mean for investors
The addition of $1.9 trillion of stimulus to the economy is a near-term tailwind for GameStop and AMC. Even so, that doesn't necessarily make their stocks attractive investments.
Shares of GameStop and AMC have already taken off in 2021, gaining about 1,300% and 430% year to date, respectively, as of this writing. And while the stimulus plan has the potential to provide both businesses a near-term boost, they still face serious long-term challenges. Investors who want to start a position in either of these two popular stocks should wait for a pullback and prepare themselves for the extreme levels of volatility these stocks will experience in the coming months.
