AMC Theatres Shares Just Plunged More Than 50%. What’s Next for Stocks Roiled by Reddit?

Photo by: STRF/STAR MAX/IPx 2020 9/1/20 AMC Stock shares rose over 9% after the company announce it would reopen 140 additional tTheaters by September 4, 2020, bringing the number of its theaters open to about 70%.

AMC Entertainment’s shares took a steep tumble Thursday, not yet a coda to the company’s frenetic stock market activity fueled by users on Reddit, TikTok, the app Robinhood and other social media platforms.

AMC’s stock was down more than 50% on Thursday afternoon, one day after it surged more than 300% and skyrocketed to $20.31 per share. Comparatively, AMC’s stock was trading at roughly $4 per share in October. It is currently hovering at $10 and change. The company hadn’t seen these levels of optimism in over a year, particularly due to the pandemic’s impact on the theater business. It’s still unclear when the public will feel comfortable returning to the movies and AMC can again start selling ticket stubs. The saga around AMC Entertainment and other stocks, such as GameStop and American Airlines at the hands of Reddit traders, has been erratic and constantly evolving, raising the question: What happens next?

“Robinhood investors are a bit of a wildcard,” says Eric Handler, a research analyst at MKM Partners who covers AMC Entertainment. So is this a short-term phenomenon or something sustainable? “Right now, the company’s stock price has been decoupled from financial reality,” he says. “History would suggest over the long term, true financials and historical valuations will matter. It’s just a matter of when.”

AMC, which was at risk of bankruptcy even before the pandemic, became a target because amateur traders online were looking to influence stocks that were heavily short-sighted, says Eric Wold, an analyst with B. Riley & Co., who also covers AMC Entertainment. However, there was an injection of long-term confidence earlier in the week as AMC announced it secured $917 million in financing, enough to get the struggling cinema chain through the ongoing coronavirus crisis.

‘There were a lot of people betting against the company being successful,” Wold says. “AMC was the only exhibitor at risk of potential bankruptcy. They had too much debt on the balance sheet.

Since the stock is currently trading well above pre-pandemic levels, AMC and investor Silver Lake, a private equity firm, have used the tumult to their advantage. AMC said on Thursday that Silver Lake opted to convert the $600 million bond it owns into equity. According to a securities filing, the move will lighten AMC’s debt load by $600 million. In return, AMC will issue 44,422,860 Class A shares to Silver Lake, resulting in a $284 million boost.

“They were able to benefit from the stock going higher,” Handler says. “That allowed the company to get some cash at a higher price than they would have two weeks ago.” He adds, “It gave AMC added liquidity it wouldn’t have otherwise.”

Wold argues the long-term concerns are different for AMC Theatres, which hope to see a rebound once the general public re-familiarizes themselves with moviegoing, compared to GameStop, which has seen its irrelevance grow with the rise of online gaming. There’s still uncertainty with AMC, to be sure, but analysts are hopeful that the cinema chain will be able to recover in the back half of 2021. However, it may be another few years before the movie theater business returns to pre-pandemic levels.

“I wouldn’t be surprised if AMC looked to take advantage further and raise additional capital,” Wold said. ‘The [exhibition] industry isn’t for certain right now with reopenings. Any additional cushion would help.”

With stock prices unmoored from companies’ financial fundamentals, shares were bound to retreat in the near term, says Joshua Mitts, associate professor at Columbia Law School who specializes in regulation of capital markets. But in the long term, valuations of companies like GameStop and AMC Entertainment may end up settling higher than they otherwise would have.

“The prices are clearly going to deflate. But this may be a breath of fresh air for some of these companies that were laboring under excessively low valuations,” Mitts says. “The folks arguing that short-sellers pushed the prices too far down – that may be right, it might be wrong, but if there’s some truth to that maybe it’s a $20 stock instead of a $5 stock.”

The stock surges instigated by users on the Reddit forum are the flip side of what some short-sellers have done online — trashing stocks anonymously for their own potential gain — for the last decade without any regulatory oversight, Mitts says. “The problem is, it’s basically a free-for-all at the intersection of social media and financial markets,” he says. “The SEC has largely been inactive when it comes to regulating trading in connection with social-media campaigns. The SEC, I think, means well but they’ve really just been left behind in terms of technological innovation.”

“At the end of the day, markets do what markets do: People will buy, people will sell. But that doesn’t mean there won’t be victims, people who were injured and misled,” he says. Mitts argues that there are specific forms of behavior designed to manipulate markets that are “deeply concerning and very dangerous” to the market. “Someone can go on a forum and say they’re buying a stock when they’re really looking to sell. There’s a form of deception there,” he says. “The pronounced problem is anonymity…It could be an engineered pump and dump.”

That said, regulators “shouldn’t be paternalistically in telling people when they can trade and cannot trade,” he added. “I’m not a fan of trading halts or Robinhood telling traders they can’t trade GameStop or AMC. People came in expecting they could buy or sell and not expecting the broker to tell them they can’t.”

There’s a possibility the SEC might take action to prosecute individuals who have engaged in the stock-buying schemes, according to Mehrdad Samadi, a financial economics professor at SMU’s Cox School of Business.

“Market manipulation laws are broadly defined as evidenced by the SEC’s historically wide-ranging anti-manipulation enforcement cases. Typically, the largest challenge in making a manipulation case is proving intent — which doesn’t seem to be an issue here,” he says. “The question is whether the SEC will actually pursue a case. Considering that some investors will inevitably be left holding the bag, I wouldn’t be surprised if the SEC acts in order to deter future episodes.”

Though short squeezing is not an uncommon practice, Wold says investors have never seen such a concerted move from message board-style groups. “It’s easy for them to change targets,” he notes. In the meantime, the app Robinhood restricted users ability to buy stocks for GameStop, AMC Entertainment and other companies that have seen a surge driven by online communities in an attempt to “limit the volatility,” he adds.

It’s a decision that has been controversial from lawmakers on both sides of party lines. Rep. Alexandria Ocasio-Cortez, who sits on the House Financial Services committee and is a darling of progressives, called Robinhood’s halting trades for its users  “unacceptable” and supported the notion of a hearing if necessary.

“We now need to know more about RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she wrote on Twitter. “Inquiries into freezes should not be limited solely to Robinhood. This is a serious matter. Committee investigators should examine any retail services freezing stock purchases in the course of potential investigations – especially those allowing sales, but freezing purchases.”

Sen. Ted Cruz, who sits on the opposite end of the political spectrum, replied on Twitter saying, “Fully agree.” In response, Ocasio-Cortez said that Cruz “almost had me murdered 3 weeks ago so you can sit this one out” and suggested he could help by resigning.