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Why Meme Stock AMC Entertainment May Have an Ongoing Lease on Life

By Rhian Hunt – Dec 22, 2021 at 9:30AM

Key Points

  • AMC's shares dropped earlier this month after a couple of its top executives liquidated part or all of their stakes in the company.
  • "Spider-Man: No Way Home" scored a record-setting opening weekend at AMC and other theater chains.
  • AMC stock rapidly recovered from its recent declines on the good news -- a demonstration of the continuing influence that retail investors have on its share price.

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Retail investors are still punching above their weight when it comes to their bullish influence on the cinema operator's share price.

After stumbling for a few days, retail investor favorite AMC Entertainment (AMC) showed that its glory days aren't quite behind it. The stock gained over 19% in Friday trading as Spider-Man: No Way Home began generating sizzling opening weekend sales. The superhero flick may have fueled AMC's surge, but it's also fairly certain that the stock would not have jumped so much without the continued dedication of its retail investor fans, who showed that the influence of the "little guy" on share prices persists -- particularly for this stock.

An early December dip for AMC

During the second week of December, it looked as if AMC's long period of overvaluation, originally driven by retail traders' attempt to generate a short squeeze, might be coming to a close. Though down considerably from its June peak, the stock was still up by around 1,200% after 2021's first 11 months. But shares dropped again after several insiders sold major parts of their stakes in the company.

A woman sitting in a movie theater in a row of empty seats, looking up toward the screen, with popcorn and a soft drink ready to hand.

Image source: Getty Images.

On Dec. 9, CEO Adam Aron sold 312,500 shares, or about 76.5% of his existing holdings in AMC, while Chief Financial Officer Sean Goodman sold 18,316 shares -- his entire stake. Both men are still entitled to issuable shares under an equity grant vesting plan. Aron has approximately 3 million shares and Goodman almost 590,000 shares potentially to be issued under this arrangement at dates in the future.

Their sales were prearranged, and Aron warned they were coming back on Nov. 9 during the company's third-quarter earnings conference call. "You should expect to see some stock transactions shortly on my behalf," he said, based on plans put in place in August. At that time, Aron was at pains to point out he would still have millions of granted shares, which would continue to give him skin in the game.

"I have an enormous personal stake in the future of our company, of your company, of AMC Entertainment," he said, telling investors that they shouldn't worry about a "brief wave of selling." Nevertheless, AMC's shares fell by more than 7% on the Friday that followed those divestitures, and continued to slide on the following Monday.

Saved by Marvel's "spider" and Reddit's "apes"

AMC's fortunes got a fresh boost at the end of the very next week when Spider-Man: No Way Home opened in U.S. theaters. The public's appetite for watching costumed crime-fighters on the big screen seems to have surged back from its pandemic lows -- the film had an opening day haul of $121.5 million and a potential $245 million opening weekend. These sales put it in the top two and top three debut performers of all time, respectively, only behind other Marvel Cinematic Universe offerings.

Viewers flocked to AMC theaters across the U.S. and internationally, according to a Dec. 17 press release, with 1.1 million people filling AMC seats on opening night. The company said it was its highest-grossing December launch in history, and its second-highest ever. Only 2019's Avengers: Endgame surpassed it. Aron put an upbeat interpretation on the data: "Spider-Man clearly indicates to us that consumers in large numbers desire the experience that only AMC theatres can provide," he said -- though rival Cinemark Holdings (NYSE: CNK) reported an all-time record opening night as well, a success it ascribed to its "state-of-the-art cinematic environment."

AMC's stock bounced more than 19% on that news in a single day, which canceled out the declines that had followed the execs' stock sales. That came just as the share sale news caused a strong upsurge in social media mentions on platforms such as Twitter, research by Quiver Quantitative indicated. One trending hashtag, #AMC500K, reflected a tongue-in-cheek prediction of an upcoming $500,000 share price for the theater operator. While that figure is meant to be humorously exaggerated, Reddit's self-described "ape army" of retail investors appears to believe there's a real possibility for them to generate another short squeeze. Short interest in AMC is currently around 16.25% and rising.

What the news means for AMC's investment prospects

Despite the influx of cash from its Spider-Man success and several other potentially upbeat catalysts such as its plans to sell non-fungible tokens (NFTs), AMC clearly isn't out of the woods. With around $1.6 billion in cash on the books as of the end of Q3 and its cash-burn rate greatly reduced, AMC appears to have a fighting chance to avoid bankruptcy. It is still considerably overvalued for its current performance, however, with its revenues still sharply below 2019 levels.

Nevertheless, it's also clear that the huge cadre of small investors who bought into AMC over the past 10 months haven't yet lost interest in it. These traders as a group are exerting considerable influence over AMC's share price, and -- as the latest surge shows -- they are prepared to "boost the signal" of any piece of positive news, giving successful theatrical releases an outsized bullish impact on the company's valuation.

In short, the enthusiasm of the WallStreetBets crowd has not only kept AMC's stock value elevated over a surprisingly long period of time, it's also amplifying the upside produced by positive news, and likely dampening the downsides from negative events. Another short squeeze probably isn't in the cards, and there are movie theater stocks positioned to be more stable for the long term. However, it seems likely that there will be more strong surges in AMC's stock price following successful theatrical debuts in 2022, powered by retail investors' optimism and persistence. As such, AMC could offer opportunities for profitable short-term investment strategies.

Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool owns and recommends Twitter. The Motley Fool has a disclosure policy.

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