The rate-hike sell off has been bad news for many speculative stocks. That’s especially the case for Reddit meme trader favorites like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME). In the case of AMC stock, the Federal Reserve’s “return to normal” with its proposed interest rate changes has sent the stock down more than 40% since Jan 3.Source: Sundry Photography / Shutterstock.com
That’s atop the decline experienced between Thanksgiving and New Year’s, when the Fed first made known it was raising rates. In total, shares in the movie theater chain, and meme stock king, have tumbled from just under $40 per share, to around $15 per share as of this writing.
In my articles on this popular meme play, I’ve long discussed the inevitability of it falling back to a price in line with its underlying value. Admittedly, this has taken some time. Even now, as one of the factors that made it bubble up in the first place (rock-bottom interest rates) is going away, the stock’s price deflation is happening at a relatively slow pace.
Nevertheless, you can expect it to continue. The self-described “Apes,” or devoted fans of the stock, continue to make their exit. Without this pool of investors, valuing the stock on factors outside of fundamentals? Investors who price stocks based on time-tested methods are slowly taking back control. In time, it’ll fall to its fair value.
AMC Stock and The End of Meme Mania
It took some time, but the phenomenon that sent this and other stocks “to the moon” may have finally ended. At least, that’s the take of Investors Business Daily, which on Jan. 24 declared it “game over for meme stocks.”
With rates rising, fundamentals are back into focus. In turn, we’ve reached the end of the line for the absurd valuations seen with AMC stock, GME stock, and other meme plays once considered “unsinkable.” Downward pressure from this has led many prior devoted fans of both names to quickly lose their “diamond hands,” throwing the towel in a wave of panic selling.
Now that meme mania is “over,” you may think AMC is on the verge of bottoming out. After all, despite the big sell off, this remains one of the most-talked about stocks on Reddit. That may be a sign of one last big rally, right?
Maybe, maybe not. There may still be a lot of talk about it on r/WallStreetBets and other subreddits.
Yet looking at Reddit threads, it appears many users making new posts about it are simply grasping for straws. For instance, one post from a few days back, where the poster is asking around about the chances of another short-squeeze. The replies to it from members of the meme community lean toward the bearish side. With many in this sphere reading the writing on the wall, I believe more meme stockers will exit rather than re-enter the AMC stock from here.
On The Road Back to Fair Value
I’ll admit that the exodus of AMC stock “Apes” isn’t going to be instantaneous. However, as market trends move more out of its favor, those still holding the proverbial bag will finally decide to give up and move on.
So, what’s the end game for AMC shares?
A price below $10 per share. How far below $10 per share is still up for debate. On one hand, it may not be at risk of falling completely back to the low-single digits it traded for in January 2021, just before the meme stock trend emerged. Mainly, because unlike “pre-meme era,” the company is relatively better capitalized, thanks to the secondary offerings it completed last year.
On the other hand, these secondary offerings resulted in high shareholder dilution. During the meme era, its share count ballooned from around 103.8 million, to nearly 514 million. The pie’s now cut into many more slices. Even if its results get back to pre-virus levels (which in itself is questionable), that doesn’t mean the business will be worth the $7-$10 per share it traded for in late 2019.
With this, the fair value of AMC stock may not be $10.45 per share, which is the average analyst price target (according to the Wall Street Journal). Instead, it may be more in line with the $6 per share median price target predicted by the sell-side. Either way, there’s no use splitting hairs. No matter how you slice it, the stock has substantial room to fall before it’s in “bottomed out” territory.
The Verdict: We’ve Reached The End Credits With the AMC Saga
Higher interest rates have been the straw that broke the meme stock trend’s back. First, fair weather speculations panicked out of it. Now, the “Ape” crowd has done so as well. A few may be staying in it for now. Yet as the chances of a rebound look dim, they’ll cash out as well.
We’ve reached the end credits with the AMC stock saga. There’s no need to stick around.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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