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Why I’m looking beyond the short-term AMC share price

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Since the end of January, the AMC (NYSE:AMC) share price has been a hot topic among retail investors across the world. Subject to short squeeze deliberation triggered by the Gamestop saga, retail investors have been banding together against hedge fund short positions.

However, while many investors are hoping a short squeeze could send the AMC share price rocketing, I also like the look of this stock’s long-term position.

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AMC short squeeze history

Firstly, let’s clear up exactly what a short squeeze is. In a nutshell, shorting a stock entails borrowing shares from a broker, betting their price will go down. These shares are then returned at the lower share price, and the difference is pocketed as profit. It is usually done by big hedge funds who take out multi-million short share positions.

However, if the price doesn’t go down, these hedge funds find themselves in big trouble. This is because short sellers exit their positions with buy orders. If these are executed at a higher price than they were borrowed for, share prices go through the roof.

In the case of AMC, things kicked off in late January soon after the Gamestop short squeeze. Retail investors quickly noticed 24% of AMC’s floated shares were held in short positions, so targeted it. By the time markets closed on 27 January over 1bn shares had been traded and the share price inflated over 300%!

There is speculation of another short squeeze as over 37.3m of the 490m floated shares are shorted. In addition to this, the AMC share price has been following an extremely bullish trend, up 42% in the past 30 days. This does point towards the possibility of another short squeeze.

AMC share price future

Though a short squeeze may drive up prices in the short run, there are also reasons why I am bullish on AMC’s long-term value. The cinema chain was decimated by Covid-19 closures, driving down revenues. However, the firm reported that as of March 2020, 527 out of its 589 US theatres were back open. This is great news as boosted capacity means revenues will start to increase again.

In Europe, however, only 27% of cinemas were reported open in the firm’s Q1 results. While this may seem bad in the short term, as Covid-19 restrictions ease across the continent, capacity will continue to grow, driving up revenues further.

CEO Adam Aron highlighted that bankruptcy was also now completely off the table, after raising over $917m of new equity and debt capital. This puts AMC in a strong financial position moving forward past the pandemic.

However, with the streaming industry growing at an accelerated rate, cinemas face stiff competition. Streaming subscriber numbers surged 34% in 2020, with a big part of this attributable to the pandemic. The industry is expected to keep growing by over 20% year-on-year, as companies like Netflix and Disney increase in popularity.

What I’m doing now

As a current investor in AMC, I’m trying to look past the short squeeze speculation. I prefer to invest looking at the long-term value of a stock. I like the outlook for AMC as the cinema is finally opening its doors to customers again. The fact bankruptcy is out of the picture now is a plus too. Therefore, I will be holding for the long term.

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Dylan Hood owns shares in AMC Entertainment Holdings. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney. 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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