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GameStop and AMC stocks crash: Is the meme stock mania finally over?


GameStop and AMC stocks crash

GameStop Corp. shares have experienced a significant decline for the third day in a row after the company announced its intention to potentially sell up to 45 million shares. This announcement has greatly undermined the meme-fueled rally that had previously caused the stock to soar at the beginning of the week. This particular rally was driven largely by retail investors who were heavily influenced by social media trends and the resurgence of interest in so-called "meme stocks." The potential sale of such a large number of shares has introduced a new level of uncertainty, causing investors to reassess their positions and contributing to the sharp decline in the stock's value.


On Friday, the shares of GameStop plummeted by as much as 25%. This significant drop came after the company announced that it could sell class A stock through an open market agreement. Additionally, the company reported a decline in its preliminary first-quarter net sales. This sharp decrease has effectively reversed the rally that saw the stock price increase by an astonishing 179% at the start of the week. Over the course of the three-day retreat, more than $8 billion in market value has been wiped out. The dramatic fluctuations in GameStop's stock price highlight the volatility and speculative nature of the market surrounding meme stocks, where prices can be driven up or down rapidly by investor sentiment and news announcements.



Wedbush analyst Michael Pachter, who has maintained a bearish outlook on GameStop's stock, commented on the company's decision to sell shares. He noted that the company is prudently taking advantage of the opportunity to raise capital at elevated prices. By issuing new shares when the stock price is high, GameStop can generate significant funds that could be used for various corporate purposes, such as paying down debt, investing in new projects, or shoring up its financial position. Pachter's remarks suggest that while the move might be strategically sound from a financial perspective, it also reflects the company's recognition of the current overvaluation of its stock price, driven by speculative trading rather than fundamental business performance.


In its announcement on Friday, GameStop revealed that its preliminary first-quarter net sales were estimated to be between $872 million and $892 million. This figure represents a substantial decrease from the $1.2 billion reported in the same period the previous year. The decline in sales indicates that the company is facing significant challenges in maintaining its revenue levels, which could be due to a variety of factors including shifts in consumer behavior, increased competition, and the broader impacts of economic conditions. The drop in sales further underscores the difficulties GameStop is encountering as it navigates its way through a rapidly changing retail landscape and attempts to reinvent its business model to stay relevant.



AMC Entertainment Holdings Inc., which has also been caught up in the recent stock market volatility associated with meme stocks, saw its shares fall by as much as 5.4%. Earlier in the week, AMC had taken advantage of the surge in its stock price by swapping shares to reduce its debt burden. The company also announced the completion of an equity offering that had been previously planned. This move allowed AMC to raise additional capital while its stock price was inflated by the speculative trading activity. By reducing its debt and increasing its cash reserves, AMC aims to strengthen its financial position as it continues to recover from the significant disruptions caused by the COVID-19 pandemic, which severely impacted its business operations and revenue.


Pachter also commented on AMC's financial strategy, noting that it is sensible for the company to focus on reducing its debt and for GameStop to build up its cash reserves. Both companies are attempting to improve their financial stability while they develop strategies to return to profitability. AMC is leveraging the current market conditions to manage its debt more effectively, while GameStop is using the elevated stock price to secure additional funds. These steps are part of broader efforts by both companies to navigate their respective challenges and adapt to a rapidly changing business environment. By focusing on financial prudence, both firms are laying the groundwork for potential future growth and stability.



The significant decline in stock prices on Friday coincided with a notable reduction in the intense trading activity that had driven the rally earlier in the week. Giacomo Pierantoni, head of data at Vanda Research, pointed out that retail investors' purchases of GameStop and AMC shares had decreased significantly. This decline in trading activity suggests that the initial surge in interest, which was largely driven by retail investors coordinating through social media platforms, is beginning to wane. As the fervor diminishes, the stock prices are adjusting to reflect more traditional market dynamics and investor sentiment.


Over the past two days, GameStop experienced approximately $5 million in inflows, while inflows into AMC were nearly non-existent on Thursday, according to Pierantoni. This sharp contrast indicates that while there is still some level of interest in GameStop, the enthusiasm for AMC has significantly tapered off. The disparity in inflows highlights the varying degrees of investor confidence and interest in these two companies. The reduction in new investments suggests that the momentum behind the recent rally is faltering, leading to a stabilization or decline in stock prices as the speculative fervor dissipates.


The recent resurgence of Keith Gill, known online as "Roaring Kitty," on social media played a role in sparking the latest rally in meme stocks. Gill was a central figure in the retail buying frenzy of 2021, and his return to social media reignited interest among retail investors. The high volatility and intense options trading that followed brought back memories for Wall Street investors of the events in early 2021 when retail traders drove the stock prices of GameStop and AMC to unprecedented levels. Gill's influence underscores the significant impact that key online personalities can have on market movements, particularly in the realm of meme stocks where investor behavior is heavily influenced by social media trends and sentiment.



However, the current market conditions are not the same as they were in early 2021. The level of options trading activity for GameStop has decreased, and the activity around AMC shares has more than halved since its peak on Monday. This decline in trading volume and options activity suggests that the intense speculative interest that characterized the previous rally is not being sustained. The reduction in activity indicates that investors are becoming more cautious and that the market is beginning to stabilize. This shift reflects a more measured and perhaps more realistic assessment of the companies' underlying business prospects and market positions.


Pierantoni concluded that the current trend indicates a collapse of this mini-bubble. When trading flows deviate from an exponential growth pattern and decline rapidly, it signals that investor sentiment is quite fragile. The rapid decline in trading activity and stock prices suggests that the speculative bubble that had driven the recent rally is bursting. As the excitement and momentum subside, the stock prices are likely to continue adjusting downward to levels that more accurately reflect the companies' fundamental value and business performance. The fragility of investor sentiment underscores the inherent volatility and risks associated with meme stocks, where prices can be heavily influenced by short-term trends and social media-driven trading behavior.


17.05.2024



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