By now, many investors are following the short squeeze saga with Reddit group r/wallstreetbets and the meme stocks on its shortlist (pun intended), if not actively fueling it. Free trading app Robinhood, which filed to go public last week, is tied to the story as the platform many activist investors use to drive up meme stock prices.
That's why Robinhood investors are making AMC Entertainment (AMC) stock one of their biggest holdings. Let's take a deeper dive and see if you should get in on the action.
Image source: Getty Images.
Why Robinhood?
Robinhood markets itself as the trading app for the masses -- take from the rich, give to the poor. That may be a noble mission, but many scrutinize the company for enticing novice investors into trading without providing enough information.
It's the perfect platform, though, for activist investors to get like-minded traders on board and drive up meme stock prices.
Reddit groups brought about a short squeeze for GameStop (NYSE: GME) stock when it banded together in January, causing a hedge fund to lose a significant amount of money. Since then, the groups have targeted other heavily shorted stocks, such as Lemonade (NYSE: LMND) and AMC. But that's not the only reason investors are buying AMC stock.
Are movies coming back?
AMC stock has potential for a real turnaround. Notwithstanding dwindling theater ticket sales before the pandemic, confident investors see a chance for the stock to rise as people resume theatergoing and AMC's sales increase.
How likely is that to happen? That's the question at the heart of the debate. There are clear signs that the tide is turning, such as the success of the recent theatrical release of the feature film F9, which took in $70 million in its opening weekend. Disney's (NYSE: DIS) Black Widow bested that with $80 million.
So far, AMC hasn't seen the needle move much in its sales rebound. In 2021's first quarter, most of the company's almost 600 U.S. theaters were open, but capacity limits ranged from 15% to 60%. Less than 30% of international theaters, or under 100, were open. Sales were down 84% year over year, but net loss narrowed to just over $500 million.
Those numbers are likely to improve in the second quarter as more films are released for the summer season. But they won't match pre-pandemic levels for a while, if ever.
On the positive side, AMC raised hundreds of millions of dollars in debt and new stock issues to stay comfortably solvent, so there's no short-term danger of its going under, even if sales are still recovering.
As far as buying the stock goes, it's a risky method of investing that involves a bet on one outcome with unclear odds. Over the past two weeks, AMC's stock price has lost 20%, which may be a sign of investors losing confidence in the meme stock's chances at a short squeeze or sales rebounding quickly. Some investors who sold at the high will make money, but most investors are bound to lose, even if the price goes back up. If you have money to invest, there are great growth stocks on the market that offer outsize gains with less risk than AMC.
