GameStop, AMC Slide: 'Danger Zone' Stocks to Watch

Key Takeaway

• GameStop and AMC experience significant volatility, with recent declines of 15% and 11%, respectively, after a brief rally.
• Despite financial improvements, GameStop remains in the "danger zone" due to high valuations against poor cash flows.
• The current meme stock rally is seen as speculative and fleeting amid economic slowdown and reduced consumer savings.

Meme Stock Volatility

This week, meme stocks such as GameStop and AMC have experienced significant volatility, initially rallying before tumbling after just two days. These stocks, popularized through social media platforms like Reddit and X (formerly known as Twitter), have drawn attention from retail investors aiming for quick profits. The phenomenon, which began between 2020 and 2021, saw investors targeting short sellers and hedge funds with pessimistic views on these companies, leading to forced coverings of short positions and a surge in stock prices.

Analyst Perspectives

David Trainer, CEO of investment research firm New Constructs, has shared insights on the current state of meme stocks, particularly GameStop. Despite improvements in fundamentals, Trainer maintains that GameStop remains in the "danger zone," a category for stocks likely to see significant price decreases due to high valuations relative to poor cash flows and profits. Trainer noted that GameStop had raised over $1 billion through a share offering in 2022, improving its financial position and removing it from his "zombie stock" list, which includes companies at risk of bankruptcy or significant shareholder dilution.

Market Reactions and Predictions

Recent trading activities have seen GameStop and AMC shares decline, with GameStop falling 15% and AMC by 11% on Wednesday. This downturn followed a brief rally attributed to a social media update from Keith Gill, known as "Roaring Kitty," who had previously influenced a surge in GameStop shares in 2021. Analysts, including Wolfe Research's Rob Ginsberg, have indicated that the meme stock rally, driven by a short squeeze, may soon reverse, citing technical signals and historical patterns of similar rallies followed by sharp declines.

Economic Context and Future Outlook

The meme stock rally occurs amidst an economic slowdown and reduced consumer savings, contrasting with the conditions during the 2021 frenzy. Economic indicators suggest slowed growth, with a personal savings rate significantly lower than in early 2021. Critics like Boaz Weinstein of Saba Capital Management have labeled the rally as speculative, highlighting the disconnect from fundamental investing principles amid current market volatility. Despite the recent gains, the broader economic context and lower trading volumes suggest that the current meme stock mania may be more fleeting than its predecessor.

Street Views

• David Trainer, New Constructs (Bearish on GameStop):

  "While fundamentals for the stock have improved, GameStop is still in the 'danger zone'... [We] highlighted GameStop’s soaring meme-stock driven valuation, lack of profitability relative to peers, and increasing [free cash flow] burn."

• David Trainer, New Constructs (Bearish on AMC Entertainment Holdings):

  "AMC 'isn’t even worth' $1 per share, as it’s 'nowhere near what the stock valuation implies.'"

• David Trainer, New Constructs (Bearish on DoorDash):

  "The topline results from DoorDash’s first-quarter earnings report may 'look positive on the surface,' but they 'mask the ongoing unprofitable nature' of its business."

• David Trainer, New Constructs (Bearish on Robinhood):

  "Raising additional capital to fund this cash-burning business would likely come at a high cost... Robinhood’s once hyper-growth has slowed significantly, which makes its cash burning operations look even more alarming."

• David Trainer, New Constructs (Bearish on Beyond Meat):

  "Beyond Meat's shares could fall further based on declining revenue also on 'unsustainable cash burn'; competitive disadvantages in a crowded industry; and the 'unrealistic expectation' that it can improve profitability while more than doubling its market share."