The Dow Jones and S&P 500 indexes tumbled on Tuesday, as concerns related to the economy’s faltering recovery overshadowed optimism over the Federal Reserve’s possible continuation of its accommodating stance following disappointing U.S. payroll data.
As the economy exhibits signs of slowing growth, fundamentally weak stocks that surged in price over the past few months on social-media hype surrounding them could suffer a significant pullback in the near term.
Therefore, we think the shares of struggling companies GameStop Corporation (GME) and AMC Entertainment Holdings (AMC), which are currently trading at lofty valuations because of short squeezes triggered by Reddit and other social media forums, are susceptible to a massive price decline in the near term. Indeed, Wall Street analysts expect these stocks to plunge more than 50% in price in the coming months.
AMC Entertainment Holdings, Inc. (AMC)
AMC is a movie theater chain that operates through two segments: Domestic and International markets. The Leawood, Kans.-based concern licenses first-run films from distributors controlled by film production corporations and independent distributors on a film-by-film and theater-by-theater basis. It operates 1,004 theatres and 11,041 screens across 15 countries.
In June, AMC agreed with Mudrick Capital Management, L.P. to raise $230.5 million from an offering of 8.5 million shares of its common stock. AMC will use the proceeds from the transaction to buy more theater leases and will seek deleveraging opportunities. However, selling shares could result in the dilution of its shareholder value.
AMC’s total operating expenses increased 51.1% year-over-year to $741.3 million, while its operating loss came in at $296.6 million in the second quarter. ended June 30, 2021. The company reported a $343.6 million net loss , and its loss per share came in at $0.71 over this period.
The stock failed to beat the consensus EPS estimates in each of the trailing four quarters. In addition, analysts expect AMC’s EPS to decline at the rate of 217% over the next five years. Over the past three months, the stock has declined 13% in price.
A $8.17 consensus price target represents an 82.9% potential downside from its $47.83 last closing price.
AMC’s POWR ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AMC has rated an F grade for Stability and Value, and a D for Sentiment. Additionally, within the F-rated Entertainment – Movies/Studios industry, it is ranked #7 of 8 stocks.
To see additional POWR Ratings for Growth, Quality, and Momentum for AMC, click here.
GameStop Corp. (GME)
GME in Grapevine, Tex., is a specialty retailer that sells games and entertainment products through e-commerce and various stores in the United States, Canada, Australia, and Europe. It operates stores and e-commerce sites under the GameStop, EB Games, and Micromania brands, and collectibles stores under the Zing Pop Culture and ThinkGeek brand. In addition, the company offers Game Informer, a print and digital video game publication that features reviews of new title releases, game tips, and news regarding the video game industry.
In July, GME announced the expansion of its North American fulfillment network and a leasing agreement for a 530,000 square foot facility in Reno, Nevada, which is set to open in 2022. However, while the company’s new location will enable it to expand its product offerings, it will lead to a significant cash outlay in the near term.
GME’s operating loss came in at $40.8 million in the first quarter, ended May 1, 2021. The company reported a $66.8 million net loss, while its loss per share amounted to $1.01. Moreover, its net cash used in operating activities came in at $18.8 million.
GME’s EPS is expected to decline at 48.2% rate per annum over the next five years. A $5.45 billion consensus revenue estimate for the next year represents a 2.2% decline year-over-year. Although the stock soared 976.2% in price year-to-date, driven by the Reddit-fueled meme stock rally, it has declined 21.5% over the past three months.
Closing yesterday’s trading session at $199, the average analyst price target of $88.33 represents a potential 55.6% downside.
GME’s weak fundamentals are reflected in its POWR ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. The stock also has an F grade for Stability, and a D for Value and Sentiment. In the B-rated Specialty retailers industry, it is ranked #36 of the 40 stocks.
In addition to the POWR Ratings grades I have just highlighted, you can see the GME rating for Growth, Quality, and Momentum here.
Click here to checkout our Retail Industry Report for 2021
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AMC shares were trading at $46.55 per share on Wednesday afternoon, down $1.28 (-2.68%). Year-to-date, AMC has gained 2,095.75%, versus a 21.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...
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