GameStop Stock vs AMC – Which Memestock Is Better?

GameStop Corp (NYSE:GME) found itself at the center of a trading frenzy at the start of 2021. Retail investors gathered on forums like Reddit’s WallStreetBets and Discord to organize a short squeeze. This sparked a wave of short squeezes and meme stocks that included beleaguered movie chain AMC Entertainment (NYSE:AMC).

So which is the better bet between GameStop vs AMC stock?

Both companies were essentially left for dead by hedge funds until they had new life breathed into them by the retail trader brigade. The gamma squeeze gave them each a second chance to revive flailing businesses, and they reacted in different ways over the remainder of the year.

Now enough time has passed for it to be clear that the “diamond hand holders” will be victorious against the big money funds. Investing fundamentals were thrown out the window for both these stocks, and that means we need to dive deeper to determine if they can maintain or even increase in value.

Why Was GameStop Heavily Shorted?

The over-$65 billion video game industry is growing fast, and both game developers and console makers are benefitting. However, many games moved to digital and streaming formats. This makes it much more difficult to resell physical games, which is the nuts and bolts of Gamestop’s business model.

Even before the economy took a turn for the worse, the retailer was on the downswing from its peak of about $10 billion annual revenue in 2011. By 2019, it dropped to $6.4 billion, and the pandemic sparked a further decline to $5.08 billion the next year.

The rapid decline on top line sales led to a mountain of short interest in the stock as hedge funds bet on the company going belly up. However, the memestock frenzy sparked a resurgence in share price, even if GME was still saddled with debt of $1.78 billion after fiscal Q2.

As the company gets a second lease on life, management sees an opportunity. It is investing in upgrading fulfillment, expanding ecommerce, and shuttering unprofitable stores. In spite of these initiatives, it’s still operating at a net loss every quarter, and has a rotating door in its c-suite. COO Jenna Owns, FVO Jim Bell, and CEO George Sherman were all replaced within a year’s time.

There’s no telling if it will recover, but it’s not the only struggling company.

Can AMC Entertainment Survive?

Movie theaters represent a $9.4 billion market in the U.S., but the market is fighting against the dominance of streaming services. The lockdowns caused movie studios to bypass theatrical releases for major blockbusters until summer 2021.

AMC eventually reached deals with some studios like Warner Bros for exclusive theatrical releases as it became clear attending a movie theater will remain part of the culture. The company leaned into its memestock status, with an Investor Connect website that’s clearly geared toward its large retail investor base.

The industry is continuing to recover while the company surpasses analyst expectations. Heading into the next fiscal quarter, revenue of $1.35 billion is up 25.6 percent compared to the prior year’s total. Although numbers are up from 2020, they still fall short of top line figures during “normal” times. Lower sales could act as a drag on profits.

GameStop Financials

In spite of its business challenges, GameStop has pretty solid books. The gaming retailer has no long-term debt and is building out its customer care operations in Florida, along with its Reno, Nevada-based fulfillment.

Its net sales in the first half of the year were $2.46 billion, which translated on the bottom line to a net loss of $128.4 million. That produced for investors an EPS loss of $1.85 per share, compared to $4.28 in the same period of the prior year.

GameStop has assets valued at $3.54 billion, including a monstrous $1.77 billion in cash and equivalents. While these are deep reserves upon which to pivot the business model, it’s unclear whether GME can truly pull off the turnaround investors need to justify its market capitalization of over $15 billion.

AMC Forecast

AMC is beginning to recover from the pandemic, reporting 100 percent of its 596 American theaters and 99 percent of its 351 international theaters open. CEO Adam Aron mentioned this is the first time that is the case since 2019 and credits the rapid healthcare response and better movie content for the upswing.

October admissions were the highest on record over the past couple of years, and the company had $1.8 billion in liquidity heading into the fourth quarter. A solid release schedule through 2022 seems to signal that the theater chain’s balance sheet will continue looking better over time.

Revenue is up across the board, including admissions and food/beverages, as its average screen count rose to 10,151. The million dollar question is whether its inflated share price is the new normal.

Is It Safe to Invest in GameStop?

You don’t need to look far to find a market analyst looking at GameStop with chagrin. Rather than investing in the underlying business using fundamental analysis, it’s simply the target of a retail trader short squeeze.

It remains a very risky bet. Console makers are increasingly focused on digital and streaming, and they’re even making digital-only consoles. This could spell doom for GameStop, which makes nothing from the in-game sales set to rise to $340.7 billion a year by 2027.

But the virality of its investment could last for some time still.

Swap AMC Stock For IMAX or Cinemark?

The biggest risk to AMC is it still hasn’t proven its long-term sustainability. The chain is trading at an over $20 billion valuation, and its third quarter revenue of $763 million trounced analysts’ estimates but still fell short of pre-pandemic levels that clocked $1 billion for the quarter.

Translation: the company has much more downside than upside. Even AMC management has warned retail traders to only invest what they can afford to lose.

With studios pushing for more focus on streaming, the multiplex depends on exclusive showings that could cost it more because creators are more secure with their other options. Rivals like Cinemark Holdings (NYSE:CNK) or Imax (NYSE:IMAX) may be a more prudent choice.

GameStop Stock Vs AMC: Which Memestonk Is Better?

GameStop and AMC spent the majority of the year trading at inflated share prices due to meme support from the retail traders at r/WallStreetBets. Each company was heavily shorted by hedge funds and seemed on the verge of bankruptcy due to slowing revenues that only accelerated during the past few years.

However, the memestock trading frenzy breathed a second life into each company. And the constant buzz in online forums is keeping the price higher than institutional investors can fathom based on a calculation of fundamentals.

Both companies remain overvalued when analyzing cash flows, but the horde of retail investors is unrelenting. Their diamond hands have successfully blown up hedge funds. If you already made a fortune on either company, congratulations. However, if you’re thinking of buying in now, be wary and prepared to lose a chunk of change as you’re left holding the bag when the fad eventually fades.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.