Short AMC & GME

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Meme stock AMC Entertainment (AMC) reported 4Q21 earnings Tuesday afternoon. Gamestop (GME) will report later this month. Both stocks surged higher last year on massive short squeezes. Hedge fund Melvin Capital lost more than 50% and almost $7 billion shorting GME in January 2021 (“Hedge Fund Melvin Lost $6.8 Billion In A Month. Winning It Back Is Taking A Lot Longer” [SUBSCRIPTION REQUIRED], Juliet Chung, WSJ, 1/29/22). However, the backdrop is much different now with inflation raging and the Fed tightening. The stocks have already begun to unwind – and they have much further to go.

AMC has a market cap of more than $9 billion. However, it lost almost $300 million on an Adjusted EBITDA basis in 2021. In a best case scenario, it could breakeven on that basis in 2022. It’s hard to envision the company becoming solidly profitable under any scenario. Even though the stock has come off quite a bit from its highs, with an intrinsic value that is probably $0 combined with the tightening liquidity backdrop I mentioned in the introduction, AMC is still likely to be a profitable short. Eventually, even the stubbornest “AMC Ape” will throw in the towel (“Inside AMC’s Crazy, Bonkers, Upside-Down Year of Apes, Memes and Shorts” [SUBSCRIPTION REQUIRED], WSJ, 12/18/21).

A similar argument applies to GME. GME has a market cap of $9 billion but I see no path to profitability. Even though the stock is well off its highs from last year, the unwind is likely to continue for the foreseeable future.

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