Investors around the world continue to pile into ‘meme stock’ AMC Entertainment (NYSE: AMC). Here in the UK, AMC was among the top 10 most purchased stocks on investment platform Hargreaves Lansdown last week. Meanwhile, on Freetrade, AMC was the second most traded stock for the week.
Should I buy AMC shares myself? Let’s take a look at what’s going on here.
Could AMC shares see another short squeeze?
I think most people buying AMC stock at this point in time are buying for one main reason – the possibility of a further short squeeze. A short squeeze occurs when short sellers (those betting on a stock to fall) are forced to close their short positions. This often sends the price of the shorted stock much higher.
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I think another short squeeze here is certainly a possibility. Looking at the short interest data on AMC, it remains quite high at around 20%. If buying pushes the stock higher, short sellers may close their short positions.
However, buying AMC stock simply because short interest is high is akin to playing with fire, in my view. That’s because, looking at the fundamentals for AMC, there appears to be an extreme disconnect between the current share price and the true value of the company. In other words, there’s a considerable amount of downside risk here.
Share price disconnect
Don’t get me wrong, the outlook for AMC has improved significantly this year. Covid-19 vaccines are being rolled out and the world is reopening. People are going to movies again. Last weekend was the best weekend for ticket sales since the pandemic started. AMC has also raised capital recently (around $600m), strengthening its financial position significantly.
There’s just no way I can justify the company’s current market capitalisation of $22.9bn, however. That’s over 30 times the market cap at the end of 2019 – when the company generated all-time high revenue of $5.5bn. That just doesn’t make any sense, in my view.
Wall Street analysts see 87% downside
It’s worth noting that the average Wall Street price target for AMC is just $5.25. That implies downside risk of 87% from the current level. Valuations can stay elevated for a long time. However, the market has a habit of restoring stocks to their true value sooner or later. This leads me to think that eventually, AMC stock is heading for a big fall.
We could be seeing the start of a share price crash already. Recently, AMC’s share price has experienced a big leg down, falling from above $60 to below $40 in a ‘meme stock massacre’. I wouldn’t want to be holding on to the stock if it starts another leg down.
AMC stock: I’m steering clear
Given AMC’s high valuation, I’m going to steer clear of the stock. Why take a huge risk buying the stock when there are so many other great stocks to buy today?
