The meme stocks craze is back! Meme stocks like GameStop (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC) surged by more than 30% in pre-market trading on Tuesday and remained on track to extend their unprecedented gains.
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These stocks were termed “meme stocks” due to their unprecedented price gains in 2020 and 2021, driven by social media chatter, particularly on platforms like Reddit’s (NYSE:RDDT) WallStreetBets. Retail investors came together through social media platforms like Reddit to challenge established hedge funds and institutional investors.
Rally in GME Stock
Yesterday, GameStop soared by more than 70% following the return of meme hero, “Roaring Kitty.” Roaring Kitty, whose legal name is Keith Gill, had driven day traders to invest in GameStop stock and call options from 2020 to 2021, resulting in a surge in the stock. Over the past year alone, GME stock has surged by more than 40%.
The strong rally in GME stock on Monday caused losses of around $1 billion for short sellers, according to a CNBC report citing data from S3 Partners. Short selling involves borrowing a stock you believe will decrease in price, selling it, and later buying it back at a lower price than it was initially paid for. This process allows traders to profit from the price difference.
According to the report, citing data from S3, short sellers in GameStop could have lost $1.24 billion in May, including Monday’s losses.
Meme Craze Drives AMC Higher
The surge in GME stock on Monday also led to another favorite meme stock, AMC, soaring higher. Retail investors intending to capitalize on the short squeeze in the stock may also assist the company’s financials. This is because the movie theater chain uses an at-the-market offering to sell new shares during surges. While this offering is part of the company’s long-term efforts to support its capital needs, it may potentially dilute investors intending to capitalize on this rally.
According to a Bloomberg report, as of May 8, AMC could raise about $125 million by selling around 24 million shares based on the closing price of $5.19 on Monday. The report also states that over the past four years, AMC has announced at least five equity offerings to sell millions of its shares.
This is because the company currently has a massive debt of $4.5 billion that AMC intends to address with these equity offerings.
Is AMC a Buy or Sell Right Now?
Analysts remain bearish about AMC stock, with a Moderate Sell consensus rating based on four Holds and three Sells. Over the past year, AMC has dropped by more than 85%, and the average AMC price target of $4.65 implies a downside potential of 10.4% from current levels.
