AMC is a wildly overvalued joke – but it's good news for shareholder democracy
AMC shares have exploded even as the company sold 8.5 million new shares to Mudrick Capital this week. John Stepek explains what's behind the stock's remarkable rally.
Shareholder perks used to be a big deal, or so I hear.
In the good old days, sadly mostly before I was old enough to pay proper attention to the stock market, lots of companies, particularly consumer-facing ones, would give shareholders genuinely decent discounts or perks.
For example, at one point, early shareholders in Eurotunnel had a right to unlimited £1 return tickets across the Channel.
Those perks have mostly dwindled away (no wonder, you might think).
But now the retail investor revolution in American might be bringing them back...
You can't make a narrow economic argument for investing in AMC
AMC is a cinema chain. As you can imagine, cinemas have not been the best business to be in over the past year, what with them all being shut down, and no one releasing any films.
AMC however, is also a "meme" stock. You remember the GameStop frivolity from a few months ago? AMC is a similar story. If anything, it's even more deranged.
AMC's share price doubled yesterday. It has risen by about 3,000% since the start of the year. And it was also the most actively-traded stock in the US yesterday.
What makes yesterday's price action even more wild is events earlier in the week. On Tuesday morning, AMC said it had sold 8.5m new shares to Mudrick, a hedge fund. The share price was $27 a share. The price promptly went up to $32.
To be clear, you'd normally expect the share price to fall when a company issues more shares, for the simple reason that each share then represents a smaller chunk of said company. (The same logic in reverse applies to share buybacks, which is usually how they're justified).
So that was unusual. Then later that same day, the hedge fund sold all the shares it had bought, and promptly said that it thought the stock was overvalued. You'd normally expect that to hammer the price - it's a bit of a "so long, suckers!" moment.
Of course, that's not what happened. Yesterday, as we've already noted, AMC's price doubled and hit a new record high.
You can make attempts to rationalise this: the FT's Robert Armstrong has an entertaining crack at it in his Unhedged newsletter this morning.
But at the end of the day, in the narrowly rational sense of the argument, it makes no sense. You can't make an investment case based on numbers for this particular company.
So what is it all based on then? This is where we get to the shareholder perks.
This is mad, but it's also good news for shareholder democracy
AMC is offering its investors free popcorn.
That might seem an odd reason for the stock to surge. But given how silly the whole thing looks, it's as good a reason as any. Here's why.
Small investors now own something like 80% of AMC, according to the FT. As I said earlier, it's a continuation of the GameStop story, whereby a group of "retail" traders bet that the ailing high street video game chain would turn itself around.
There are lots of amateur psychologists in financial journalism trying to explain this phenomenon. And I don't exclude myself from the group.
There's the "Robin Hood" story where it's about an amorphous "poor" group of traders are sticking it to "the man" as represented by "hedge funds". By this reading, it's "occupy Wall Street" all over again. There's a fair bit of patronising handwringing accompanying this one, because it's the usual "small investors will end up getting done over and the big players will suck them dry" narrative.
My feeling is that this is rather too simplistic. The barrier to entry for investors has fallen a lot but I'm not convinced that genuinely "poor" people are gambling on stocks. Young people without a huge amount of capital as yet, maybe, but that's a bit different.
As for the rebellion aspect – there's an underlying element of nihilism to it for sure, epitomised by the acronym YOLO (You Only Live Once). This, I think, can be blamed mostly on central banks (or at least, the low interest rate environment we've ended up in) and the sense of wealth inequality created by horrendously high property prices.
If you're young, and buying a house looks out of reach, and your wages aren't rising fast, but "assets" are, then why not buy some assets, particularly the ones that are going up quickly?
But I also think people are doing this for the usual age-old reason: to get rich quick. (And also to have a laugh).
Is it irrational to put a chunk of money you can afford to lose into a slot machine where the payoff might end up being several multiples of your original stake? If AMC makes no economic sense at $20 a share, what's to stop it from going to $60? Same for doge, and all the other cryptocurrencies.
Moreover, what if you can get organised? Memes are jokes, yes – but they're also signals. Is it irrational to buy a stock if you know everyone else is going to buy it too? It's throwing the oldest market reporter joke back in the face of the market: why did AMC go up? "More buyers than sellers".
This is an interesting new force in markets. It's coming about as an extension of the investor franchise (which always creates bubbles, like in the 1920s), and companies which might otherwise have died in the pandemic are being smart enough to tap into it.
Hence "AMC Investor Connect" - why worry about loyalty cards for your customers when in reality, it's your investors who really are keeping you afloat? Investors can get free popcorn and attendance at special screenings.
But also, if you have something like 3 million private investors on your shareholder register, then why wouldn't you give them a freebie to come and spend their money in your cinema once it reopens? After all, they've already demonstrated their commitment to your business. As well as taking a punt on your shares, they might want to add to your future profits too.
To be clear, none of this means you should invest in AMC, or other meme stocks. It's still "greater fool" theory, or practically a legal form of pyramid scheme.
But it's very interesting to watch. And there are definitely elements here which are healthy for capitalism. This is shareholder democracy in action. AMC is now courting the individual - and those individuals are genuinely engaged – rather than worrying about what the big institutions might be thinking.
That's progress. Imagine what could happen if we had this sort of engagement with the Amazons and the Googles and all the other big companies whose influence we spend all our time fretting about.
Instead of having meaningless ESG drivel spouted at us from on high by politicians and CEOs, we could be engaging directly with companies on specific issues like privacy, monopoly, and all the rest of it.