The Reddit Set is Starting to Crack With AMC Stock

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As I put it a few weeks back, it’s a matter of when, not if, the Reddit/short-seller standoff with AMC Entertainment (NYSE:AMC) stock comes to an end. As seen from the “meme stock” favorite’s performance since publication of my last article on it, this “when” may have already started.

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On July 1, the movie theater chain’s stock was still above $50 per share. Down from its all-time high ($72.62 per share). But still up significantly from the low single-digit prices it traded for at the start of 2021.

Now? It’s fallen nearly 30%, to around $38.35 per share as of this writing. Retail traders active online, on platforms like Reddit’s r/wallstreetbets subreddit, may be trying to keep the hype alive. Yet, even with the hashtag #AMCday trending, more of the stock’s longs are developing “paper hands,” rather than maintaining their “diamond hands.”

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As those long the stock fold, the shorts beaten badly earlier this year may be regaining the upper hand. The result? A continued return of AMC Entertainment shares back to a valuation that makes sense relative to its fundamentals and prospects. In other words, much lower than where it trades today, even after its sudden pullback.

Why The Music’s Stopping for AMC Stock

It may have been a matter of when, not if, the hype surrounding this popular “meme stock” would come to a close. But what exactly is causing the music to stop right now? Does it have to do with the company’s underlying business? Probably not, as the stock’s price movement remains divorced from its fundamentals. However, the prospects of a slow recovery for the movie theater industry probably aren’t helping.

What’s still in the main driver for AMC stock is the battle between retail traders on the long side, and the so-called “smart money” on the short side. When I last broke it down, retail traders were still holding on, in the hopes they could cause the shorts to throw in the towel, resulting in a true short-squeeze, and in turn another parabolic run for shares.

Yet, as the weeks progress, this looks less and less like it’s going to happen. AMC may still be one of the most talked-about stocks on r/wallstreetbets. Yet, who’s to say the chatter is among those who already own the stock? That appears to be the case, as its decline since the start of July signals few new participants are entering positions.

Not only that, those who seemingly were holding it with “diamond hands” ahead of an ultimate squeeze, now have “paper hands.” Expect this to continue, as even fewer longs hop on the bandwagon, and investors overall wait for this “meme stock” to fall to a more reasonable valuation.

Post-Pandemic Growth Won’t be Enough to Soften The Blow

More likely than not, the above-mentioned pullback with this stock has a long way to go. As I discussed in my last article on AMC stock, even at $10-$15 per share, it would still be pricey. And, that’s assuming it gets back to the levels of profitability (on an EBITDA basis) seen before Covid-19. That being said, I’ll concede there may be a way for the movie theater chain to bring its revenues and profits not just back to pre-Covid levels, but above them.

After cashing in on its “meme stock status,” via dilutive stock sales, the company has over $2 billion in its coffers. It may use the bulk of this cash to reduce its debts. But it may also use it to expand its operations. In turn, the company could see greater sales, and greater profitability than seen in my previous back-of-the-envelope calculations.

However, there are two caveats. One, expanding its operations is far from a slam-dunk opportunity. The “new normal” of watching new films via streaming apps may cut short a full recovery for movie theaters. This points to AMC being better off not adding more locations.

Second, even if an expansion effort pays off, it’s still not enough to support the stock anywhere near where it trades today. This may be something to look at, if it eventually falls back to single-digit prices. But definitely not right now at around $40 per share.

Ahead of the Reddit Capitulation, Steer Clear

As seen from its declines since July 1, some retail traders are starting to throw in the towel. The odds of a short squeeze are growing slim. As more from the “Reddit set” realize that big trading profits aren’t around the corner? Expect more of them to start getting “paper hands.” After that, the longs will capitulate. Then, shares will steadily descend to more reasonable prices.

With AMC stock still far away from what could be considered a “reasonable price,” the best move is simple: steer clear for now.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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