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    What's going on with AMC Entertainment? A whacky tale of a meme stock, explained

    What's going on with AMC Entertainment? A whacky tale of a meme stock, explained

    What's going on with AMC Entertainment? A whacky tale of a meme stock, explained
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    By Yashi Gupta   IST (Updated)

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    AMC has clocked returns of 500 percent this quarter, and 140 percent this week. Its market cap has surged to over $32 billion, bringing it with the likes of Delta Air Lines and Best Buy.  

    Meme stock AMC Entertainment Holdings Inc -- the largest movie theatre chain in the world -- is making a comeback as its stock price surged to a record high on Wednesday. This red-hot rally is partly driven by Reddit’s army of retail investors. But partly, the stock is hit because some people are optimistic about venturing back to theatres. Thus, driving the stock up, up, and away.
    First things first. What is a meme stock? A stock is called a meme stock when ordinary retail investors use social media to drive interest in the company.
    Now, what's happening at AMC Entertainment?
    The stock surged over 120 percent on Wednesday, hit a new peak of $70 and fell slightly. Due to volatility, exchanges halted its trading several times during the session. Finally, the stock closed at $62.55 on Wednesday, clocking returns of 95 percent in one session.
    Then on Thursday, its red-hot rally was interrupted by the company itself. AMC preyed on the rally and sold 11 million shares. While the sale helped it raise $500 million-plus, the decision did not sit well with investors.
    Following the news, the stock dropped as low as $37.66, and closed the day at $51.34, falling as much as 18 percent. Talk about a rollercoaster ride.
    Even so, for a company that was staring at a potential bankruptcy in 2020, its stock has surged over 3,000 percent in 2021.
    AMC has clocked returns of 500 percent this quarter, and 140 percent this week. Its market cap has surged to over $32 billion, bringing it with the likes of Delta Air Lines and Best Buy.
    Why is the stock riding extreme peaks and troughs?
    Most analysts agree that the stock has detached itself from fundamentals -- the reason why it is a meme stock -- but they are less sure of the reason.
    The valuation of meme stocks is disconnected from fundamentals and reflects social media hype. These stocks surge as long as they get attention, without it, they die.
    This meme stock frenzy, according to analysts, has greater momentum than the GameStop frenzy of January 2021.
    “The meme stock phenomena are coming back with a vengeance after a two-month pause,” Charles-Henry Monchau of FlowBank SA told Bloomberg.
    Here are the events that brought the stock back in news this week:
    On Wednesday
    Remember the Reddit upstarts? Yes, the same section of retail day traders that populate Reddit boards who sent GameStop surging 700 percent in a month. The group is at it again.
    Reddit retail investors, once again, banded together to hurt the professional short-sellers betting against AMC.
    Around the same time, AMC announced an initiative called ‘AMC Investor Connect’, to reach out to its new backers. And offered free popcorns to AMC theatre visitors.
    Here’s what happened:
    The company's retail shareholder base grew beyond 3 million over the past months. So, via this ‘Investor Connect’ program, AMC plans to extend its gratitude and communicate “with its extraordinary base of enthusiastic and passionate individual shareholders,” the company said.
    The program will begin with “a free large popcorn on us when they attend their first movie at an AMC theatre this summer,” Adam Aron, the CEO said.
    Analysts couldn't help but take a jibe at it. “When a fresh pile on, sparked by the offer of free popcorn, leads to a doubling of the share price in a day, it shows a huge disconnect between price and underlying value,” Susannah Streeter, senior investment and markets analyst told Bloomberg Quint.
    A day earlier, AMC had announced raising $230 million by the sale of 8.5 million shares to Mudrick Capital Management. Typically, a share sale hurts stock price in the short term, since the sale ends up diluting the number of outstanding shares.
    AMC stock continued to trade in green as investors cheered the capital raise. This sale of shares did not impact the rally. And then it did.
    On Thursday
    On Thursday, AMC gave a shock to its buyers by announcing its intentions to sell over 11 million shares, again.
    “Under the terms of the Distribution Agreement, we may, through our sales agents, offer and sell from time to time up to an aggregate of 11,550,000 shares of our Class A common stock,” it said in an SEC filing.
    Before this announcement, its shares were up 20 percent in premarket trading. After the announcement, the company lost 18 percent by the end of the session.
    Further, by then the company had already completed its new stock sale, raising $584 million of capital. Which came as a shocker for many, since the company was valued at $347 million last December.
    However, even AMC recognises the strangeness of the situation, many believe. This is why it issued an unusual warning on Thursday.
    It warned investors against investing in its Class A common stock unless they were prepared to incur the risk of “losing all or a substantial portion” of their investment.  Talk about whiplash.
    This is not the first time AMC sold its stock though. On more than one occasion, it has sold equity to shore up its depleted balance sheet. A raging pandemic, the resulting lockdown, and the growing realm of streaming services had left AMC staring at the doors of bankruptcy.
    The party was on, wasn’t it? So, emerging markets piled in
    The biggest theatre chain in the world is so big that retail investors from India and South Africa couldn’t help but take some piece of the cake. Per a Bloomberg report, AMC was one of the five most-traded American stocks last week on Vested Finance and Stockal, two India-focused trading platforms.
    Apparently, AMC has enjoyed greater attention than Tesla, Shopify, and Facebook.
    Short-sellers, ahoy!
    Short-sellers have increased their bets against AMC shares over the last month -- possibly one of the reasons behind the rally (as WallStreetBets has it especially against hedge funds).
    A similar occurrence was seen in January 2021, when the defiant short-sellers betted against GameStop (another meme stock), fuelling the rally further.
    In a report, CNBC mentioned that 18 percent of AMC shares were still sold short through Wednesday.
    “Although we have seen some exiting of positions throughout the year, the majority of short-sellers have been happy to sit on significant paper losses in the hope that retail investors will blink first and the losses won't be realized,” Peter Hillerberg, co-founder of financial analytics firm Ortex told Reuters.
    The short-sellers lost $3 billion after the rally on Wednesday.
    “This now looks like a flawed strategy,” Hillerberg added.
    Short-sellers, or market makers form the other side of the market, borrow the stock from an investment bank and sell it back in the hopes of buying it again at a lower price and returning the shares and pocketing the difference.
    But, when the stock surges higher, instead of going lower, an event called short-squeeze occurs. It forces investors to buy the stocks back to hedge their risk.
    Leaving the options unhedged exposes them to potentially severe losses if the stock climbs further.
    This buying back of shares pushes the stock price even higher, an event called Gamma Squeeze.
    This combination of short-squeeze and massive options trading forming a Gamma Squeeze was last seen with GameStop shares.
    Now the equity is in debt
    This equity rally has extended to bonds as well. The stock might have surged to its highest-ever level within a matter of a day, but its bonds are not lagging either.
    “AMC’s 12 percent second-lien bonds rose above their face value of 100 cents on the dollar Thursday, a stunning comeback from their low of 5 cents on the dollar last November," a Bloomberg Quint report noted.
    It’s $5 billion debt, much of which is rated CCC, was trading at depressed levels at the end of 2020. Now, January’s rally combined with this week’s has shored up its financial position.
    It’s subordinated bonds due 2025 were changing hands at 81.5 cents, up from 5.5 cents last year. While it is a major improvement, it also points towards some stress -- it is a level that signifies caution.
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