Should I buy AMC shares today?

AMC shares have had a lot of momentum recently. But what’s been driving the stock to dizzying new heights? I take a look at the cinema operator.

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Cineworld cinema

Image source: DCM

AMC Entertainment (NYSE: AMC) shares are in the limelight. In the past month, the stock is up more than 75%. And in the last 12 months, it has increased by over 1,200%.

But what’s been driving the share price? Well it’s a ‘meme’ stock. Let me explain further.

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Meme stocks

It’s no surprise that the pandemic has taken its toll on AMC. Most of its cinemas were temporarily shut during lockdown. But institutional investors, such as hedge funds, have been short-selling the stock.

It’s a fancy way of saying that they have been betting that the AMC share price would fall. However, retail investors have been collaborating on Reddit (WallStreetBets). These small traders have been egging each other on to buy the stock.

The surge in AMC shares has meant huge losses for the short-sellers. These small investors have also targeted other stocks like GameStop. These have become meme stocks or online phenomena that have gone viral.

According to yolostocks.live, AMC is the sixth most trending meme stock. Needless to say the shares are still being monitored by retail traders.

Should I buy AMC shares?

In short, the stock is on my watch list. There are a few reasons why I’m not buying yet. The first one is the high valuation. Clearly, the Reddit traders have been driving AMC stock higher, which means that the share price is over-inflated.

At some point this meme stock rally is going to run out of steam. So just as the stock rose very quickly it could rapidly fall too. These small traders may also decide to take profits on their holdings. The high valuation means that AMC shares are going to be sensitive to any negative news.

My second reason is that I don’t think the influence of online traders on the AMC share price is going to end anytime soon. As I mentioned, the cinema chain is among the top 10 stocks being discussed by Reddit users.

I think it’s worth highlighting here that even AMC has acknowledged its retail investors. In its recent shareholder counter announcement, the company mentioned that “more than 80% of AMC shares are held by a broad base of retail investors with an average holding of around 120 shares”.

So what does this mean? Well, whether these small investors buy or sell, I expect there to be some share price volatility. I don’t think meme stock trading is over just yet.

In fact, AMC launched its ‘Investor Connect’ platform where it plans to reward its retail investors with incentives such as free popcorn. So far, the shares have held up well. But I’m unsure how long this is going to last.

The company

The environment is starting to look favourable for AMC. It has now reopened its sites, especially in the US. And the vaccination programme should encourage people to go and watch movies on the big screen. Over the coming months, new long-waited films are expected to be released, which should also help the company’s recovery.

These should act as tailwinds for AMC shares. But I’m not buying just yet.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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