AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) have become widely known as ‘meme stocks’ or ‘Reddit stocks’ in recent months. It started in January when a bunch of amateur investors on popular discussion site Reddit started promoting AMC and GME as excellent investments to squeeze out short sellers (investors betting against the stock). The prices went wild and created overnight millionaires, but just as quickly, the prices slid.
Nevertheless, five months later and the hype surrounding these Reddit stocks continues. So, is there any real value in either of them that would warrant a long-term investment on my part?
Are Reddit stocks a viable investment?
In the past three weeks, the AMC share price has soared 261%. Meanwhile, GME has risen 29%. Both have been highly volatile during this period.
AMC Entertainment is a US cinema chain with a global presence. As the reopening encourages visitors back to movie theatres, there’s a lot of hope for this stock. The company could enjoy a strong second half as life gets closer to normal. But I’m not so sure. I wasn’t feeling bullish on the outlook for cinema before the pandemic, and I feel even less enthusiasm for it now.
The rise of streaming has given consumers on-demand access to more television than they could ever hope to watch. It’s affordable, and there’s no need to mingle in a crowd of strangers. I also think people are looking for a chance to escape a year of endless screen time for more social interaction, so I’m not convinced cinema will be top of the list of things to do. For these reasons, AMC Entertainment is not drawing me to invest.
But also, I think the erratic trading it experienced in recent months has distorted its true value. AMC now has a $25bn market cap, earnings per share are negative, and it doesn’t offer a dividend. I think it will take years for it to return to its pre-pandemic earnings, and it’s now saddled with considerably more debt.
So far, it’s managed to raise money to pay down debt with additional share placings. I think the Reddit frenzy contributed to investor enthusiasm for this stock, but I doubt it can repeat the process indefinitely.
How does GameStop shape up?
Meanwhile, GameStop is a retailer selling video games, consoles, and gaming-related gear. It was also suffering prior to Covid-19 as the rise of e-commerce and game downloads decimated its business. Nevertheless, the Reddit mania has given us a fresh perspective on this business and it looks to be making a go of building up its online offering. That could mean a stronger future for the business.
Unfortunately, like AMC, I think GameStop may also have an overvalued share price at today’s levels and I think it will continue to see volatility in the future.
For investors looking to take a speculative punt on a stock, either of these Reddit stocks may well prove lucrative. But I’m not feeling brave enough to jump in and add them to my Stocks and Shares ISA.
