By James Rogers
"Meme stocks, which were hit particularly hard during the market selloff this year, are making a comeback in recent weeks as the market rebounds," wrote New Constructs CEO David Trainer, in a note. "Just like the reckless meme stock frenzy of January 2021 fizzled out, we believe this latest meme stock spike will be short-lived."
Shares of AMC Entertainment Holdings Inc. (AMC), which have fallen 5.9% this year, have risen 98.4% over the last three months, compared with the S&P 500 index's decline of 9.3% in 2022 and 5.7% rise in the last three months. GameStop Corp. (GME) stock has risen 19.1% this year and 76% over the last three months.
GameStop's rally has also been fueled by a 4-for-1 stock split, its first since 2007.
Nonetheless, New Constructs cites cash as a potential problem for the video game retail chain. Other companies on the "zombie" list include Carvana Co. (CVNA), Freshpet Inc. (FRPT), Peloton Interactive Inc. (PTON), Snap Inc. (SNAP), Beyond Meat Inc. (BYND), Rivian Automotive Inc. (RIVN), DoorDash Inc. (DASH), and Shake Shack Inc. (SHAK).
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"The cash crisis at GameStop is getting worse as the company burned through $263 million in FCF (free cash flow) excluding acquisitions over the TTM [trailing 12 months] ended fiscal 1Q23, down from positive FCF excluding acquisitions of $46 million in the year ago period," Trainer wrote. "With just $1.0 billion in cash and cash equivalents at the end of fiscal 1Q23, GameStop's cash balance could only sustain its cash burn for another 18 months after fiscal 1Q23, assuming cash burn is similar to the TTM."
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Recent months have seen a lot of attention focused on GameStop's efforts around non-fungible tokens. In May, for example, the retailer launched a digital wallet for cryptocurrencies and NFTs in an attempt to expand its offerings for the gaming community.
But New Constructs' Trainer is unmoved. "GameStop has played into the meme stock craze, announced a crypto/NFT business, and took a page from Tesla (TSLA), one of the original meme stocks, by splitting its stock," he wrote. "The company's valuation simply cannot be justified by the deteriorating fundamentals of the actual business."
Pointing to what he describes as GameStop's "severe cash debacle," as well as competitive challenges, the company's stock is at significant risk of declining to $0 per share, according to Trainer.
AMC also joins GameStop on the "zombie stocks" list. "AMC Entertainment has been the ultimate meme stock over the past 18-months and a favorite among retail traders, but we believe investors should be extremely skeptical of its recent rally," wrote Trainer. "We believe the stock is at risk of declining to $0 per share, as the company is burning cash at a worrisome rate."
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AMC's cash drain began long before the COVID-19 pandemic shuttered its theaters, according to Trainer. "AMC had negative FCF in 2016, 2017, and 2018, and again in 2020 and 2021," he wrote. "Combined, AMC has burned through $6.8 billion in FCF since 2014."
Earlier this month AMC announced its "APE" special dividend, which will list on the New York Stock Exchange under the symbol "APE," a nod to the investors who turned the company into a meme stock, who often refer to themselves as "apes" or "ape nation."
The special dividend of one AMC Preferred Equity unit will be issued for each share of AMC Class A common stock, par value $0.01 per share, outstanding at the close of business on Tuesday. The special dividend is expected to be paid at the close of business on Aug. 19.
Speaking during a conference call to discuss the AMC's recent second-quarter results, CEO Adam Aron said the company has the flexibility to issue more "Apes" in the future.
"I believe all of this makes us vastly, and I mean, vastly, stronger," he added. The CEO, who referred to AMC's critics as "naysayers" and "prophets of doom" during the call, said the dividend is very bad news for people "not rooting for AMC."
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However, New Constructs' Trainer notes that AMC raising additional capital through debt is likely not possible, and shareholders have already rejected further common share dilution. This left the "APE-like financial engineering" as the only available option, he added.
AMC has bought itself time with its special dividend, according to Trainer, who adds that none of the company's business fundamentals have changed. "AMC's cash crisis puts the company's stock at significant risk of declining to $0 per share as tightening financial conditions render financial engineering schemes unsustainable," he wrote.
While AMC remains a cause célèbre for a vocal community of individual investors, the company's financial health has also been cited as a cause for concern by RapidRatings, a company that assesses the finances of public and private companies.
(END) Dow Jones Newswires
August 16, 2022 14:45 ET (18:45 GMT)
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