AMC Entertainment (NYSE: AMC) shares spiked more than 20% on Monday to extend the current buying frenzy to a second successive week. Last week, AMC shares gained more than 30% before pulling back late on to trim weekly gains.
The current rally is driven by retail investor speculation with social media platforms like Reddit playing a key role. On the other side of the market, Wall Street investors have been shorting the stock in anticipation that all the speculative bull-run will come down crashing. It is fair to say that so far, retail investors are winning. AMC shares are up more than 2,000% this year.
Let us look at the view from both camps.
The bulls from WallStreetBets on Reddit
Redditors via the Reddit handle WallStreetBets remain bullish on the AMC shares. While most of their optimism is driven by mere speculation, they can point to one key factor that stands true.
One of the reasons that AMC shares suffered last year was the countrywide lockdowns which forced the company to close its 1,000+ movie theatres (featuring more than 8,000 screens). However, the Center for Disease Control and Prevention (CDC) last month said that those fully vaccinated are now free to mingle in public places without masks. Several movie theaters have also increased their audience capacities to close to 50%.
It is expected that as more people are vaccinated, attendance capacities will be raised higher. Therefore, this will boost share prices of movie theaters including AMC.
Wall Street shorts
The shorts from Wall Street see AMC shares significantly overvalued. At the current price of about $59 per share, AMC stock is trading at a price-sales (P/S) ratio of 67.54. This is an astronomical valuation for a company that faces significant competition from the rapidly growing video streaming market.
AMC has made significant acquisitions in the last five years to become the largest movie theater chain in the world but growth opportunities look relatively limited. The biggest companies are focusing more on the streaming space as compared to movie theaters and this shows where the entertainment industry is moving towards in the coming years.
Another factor that the shorts can point to is that although Covid vaccinations are working brilliantly, it is still not clear how they are coping with the new variants of Covid. Chances are we could soon fall back to more lockdowns again restricting AMC revenue opportunities to the bare minimum.
Does AMC have another level up?
AMC shares are up 512% over the last month whereas the S&P 500 index is down 0.34%. The NASDAQ 100 index has gained 0.20% over the same period. It is clear that AMC is massively overperforming the market. This is a signal of overvaluation. The stock appears to be driven mainly by speculation, which means the market sentiment can change at any time. Therefore, unless you are only taking short-term positions that you plan to close within a few days or weeks, AMC does not seem to have more levels go up. Chances are that Wall Street will come out on top in the end once the meme stock speculators turn their focus to another stock.