In the ever-evolving landscape of retail investing, few phenomena have captured attention quite like the rise of meme stocks. Cinema chain AMC (NYSE: AMC) and gaming retailer GameStop (NYSE: GME) stand as the poster child stocks of this movement, but as we approach the end of 2024, is the story coming to an end?
The big two
Both companies have fallen a long way from record highs in 2021. Retail investors had famously banded together to buy the shares, pushing the price up, and leading to sell orders triggering for some who had short positions. This series of events is known as a short squeeze. It led to a cycle of further surges, and eventually some controversial buying restrictions by brokerages.
AMC has experienced a 32% year-on-year decline, but with Gamestop up 41% over the same period.
AMC’s $8.7bn debt burden looms large, especially with interest rates near to recent highs. Annual revenue is a healthy $4.49bn, with a gross margin of 12%, but with a concerning net profit margin of -8.15%. Perhaps most alarming is a debt-to-equity ratio of -255.5%, suggesting significant financial challenges.
Looking ahead, the company is forecasting solid annual earnings growth of 46% for the next five years. However, as management continue to increase the number of shares outstanding, up 128% in the last year, debts and negative shareholders’ equity present significant risks.
With a market capitalisation of $10.2bn and a price-to-sales ratio (P/S) of 2.1 times, Gamestop’s valuation also appears stretched relative to traditional retail metrics.
The company’s annual revenue stands at $4.92bn, with a gross margin of 25.45% and a net profit margin of 0.51%. While GameStop has achieved profitability, analyst projections of a 27.4% annual earnings decline over the next three years raise concerns about sustainable growth. Whether the firm can successfully transition from bricks-and-mortar to e-commerce is unclear.
Is there an opportunity still?
So when evaluating these meme stocks, it’s essential to consider performance relative to industry peers and broader market trends. GameStop’s price-to-book ratio of 4.9 times far exceeds the S&P 500 average of 3.8 times, while AMC’s isn’t meaningful due to negative equity. Moreover, the beta values, that compare volatility to the wider market, have GameStop at 1.77, and AMC at 2.14, underscoring that these stocks aren’t for the faint hearted.
Yes, both companies are pursuing strategic shifts to adapt to changing market dynamics. GameStop’s e-commerce pivot and AMC’s digital initiatives could drive future growth. Broader economic factors, including inflation trends and consumer spending patterns, will significantly impact these discretionary spending-focused businesses. But we can’t move past the reality that events and community-led enthusiasm are the key drivers behind the movement of these stocks.
With plenty of investors still holding large short positions in these companies, both remain susceptible to new short squeeze events. This presents opportunities for short-term traders, but enormous risks for long-term investors. As a long-term Fool, these aren’t risks I consider worth taking.
I’m not convinced
While the allure of meme stocks persists, I suggest prudent investors should approach AMC and GameStop with caution. Consider these stocks as speculative positions within a diversified portfolio rather than core holdings.
So while companies like AMC and GameStop continue to captivate much of the market, the long-term investment viability remains uncertain. I’ll be keeping my distance.
