AMC Entertainment (NYSE: AMC), the popular meme stock that once soared to the moon, has been crashing down to earth lately. The company’s shares have plunged more than 70% in August, wiping out billions of dollars in market value. Meanwhile, short sellers who bet against the stock have made a fortune, raking in over $500 million this month alone.
AMC’s Share Conversion Plan Backfires
One of the main reasons for AMC’s dismal performance this month was the share conversion plan that took effect last week. The plan involved converting some of the company’s preferred equity units into common shares, which increased the supply of AMC stock in the market. The conversion also triggered a massive sell-off by some of the institutional investors who held the preferred units, such as Silver Lake Group and Mudrick Capital.
The share conversion plan was supposed to reduce AMC’s debt and interest expenses, and improve its financial flexibility. However, it also diluted the value of existing shareholders and reduced their voting power. Moreover, it gave more ammunition to the short sellers who have been targeting AMC for months.
Short Sellers Make a Killing on AMC
Short sellers are investors who borrow shares of a stock and sell them in the hope of buying them back later at a lower price, pocketing the difference. They profit when the stock price falls, and lose when it rises. Short selling is a risky strategy, as the potential losses are unlimited if the stock price keeps going up.
AMC has been one of the most heavily shorted stocks in the market, as many skeptics doubt its long-term viability amid the pandemic and the rise of streaming services. According to data from market analysis platform ORTEX, short sellers have netted approximately $522 million from their AMC positions this month, as the stock price plummeted from $36.99 on Aug. 2 to $10.67 on Aug. 30.
Short sellers have also been increasing their bets against AMC, as the short interest in the stock rose to almost 30% of its float by Aug. 30. This means that nearly one-third of AMC’s available shares are being sold short. While this could create a potential short squeeze if the stock price rebounds, it also indicates that the market sentiment on AMC is very negative.
Meme Stock Momentum Fades for AMC
Another factor that contributed to AMC’s downfall this month was the fading momentum of the meme stock phenomenon. Meme stocks are stocks that gain popularity and traction on social media platforms, especially Reddit’s WallStreetBets forum, where retail investors band together to drive up the prices of heavily shorted stocks.
AMC was one of the poster children of the meme stock craze, along with GameStop (NYSE: GME) and others. The stock surged more than 2,500% from January to June, reaching an all-time high of $72.62 on June 2. The rally was fueled by a loyal fan base of retail investors who called themselves “apes” and vowed to hold AMC “to the moon”.
However, the meme stock momentum has waned in recent months, as many retail investors have cashed out their profits or moved on to other opportunities. The hype and excitement around AMC have also faded, as the company has failed to deliver any positive news or surprises. The stock has been trading below its 50-day and 200-day moving averages, indicating a bearish trend.
AMC Faces an Uncertain Future
The outlook for AMC remains bleak, as the company faces multiple challenges and uncertainties in its industry. The Covid-19 pandemic has severely impacted its business, as movie theaters have been forced to close or operate at reduced capacity for most of the past year and a half. Although some theaters have reopened recently, they still face health risks and consumer hesitancy.
Moreover, AMC has to compete with the growing popularity of streaming services, such as Netflix (NASDAQ: NFLX), Disney+ (NYSE: DIS), and HBO Max (NYSE: T). These platforms offer consumers more convenience and choice, as they can watch movies and shows at home or on any device. Some studios have also opted to release their movies simultaneously on streaming and theaters, or even skip theaters altogether, reducing AMC’s exclusivity and revenue potential.
AMC’s financial situation is also precarious, as the company has accumulated a huge debt load of over $5 billion during the pandemic. Although it has raised some cash from selling shares and converting debt, it still faces high interest expenses and looming debt maturities. The company also reported a net loss of $344 million in the second quarter of 2023, despite a slight improvement in revenue.
Conclusion
AMC Entertainment has been one of the worst-performing stocks in August, as its share price plunged more than 70%. The company’s share conversion plan backfired, triggering a sell-off by institutional investors and diluting existing shareholders. Short sellers who bet against AMC made a killing, raking in over $500 million this month. The meme stock momentum also faded for AMC, as the retail investors who once supported it lost interest or moved on. The company faces an uncertain future, as it struggles with the pandemic, the streaming competition, and its massive debt burden.
