Meme stocks GameStop Corp. GME and AMC Entertainment Holdings Inc AMC are having another moment, gaining 20% and 48.7% in the past month, respectively. New Constructs analyst David Trainer remains skeptical of the two stocks and said both AMC and GameStop's underlying businesses continue to struggle.
AMC's Cash Burn: Trainer said AMC's problems began well before the COVID-19 pandemic in 2020. The company has now burned through $6.8 billion in free cash flow since 2014.
Trainer pointed out the company was narrowly able to avoid bankruptcy by raising capital and heavily diluting shareholders during the pandemic. After the company failed to gain shareholder approval to sell even more shares, AMC found a workaround to raise capital by selling preferred equity shares under the ticker APE.
Trainer estimates AMC only has enough cash to sustain operations for another 20 months or so unless its business fundamentals improve significantly.
"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 said.
GameStop's Deteriorating Fundamentals: As for GameStop, Trainer estimates the company has only about 18 months of cash on hand and said it will be extremely difficult and expensive for the company to raise additional capital given it has failed to improve profitability over the past four years.
GameStop’s net operating profit after-tax (NOPAT) margin fell from 3% in fiscal 2019 to -6% in the past four quarters, while its return on invested capital (ROIC) fell from 5% to -9% in that time.
"The company’s valuation simply cannot be justified by the deteriorating fundamentals of the actual business," he said.
Trainer said GameStop shares also face a significant risk of falling to $0 in the long term.
Benzinga's Take: In the most recent quarter, AMC reported a net loss of $121.6 million and GameStop reported a net loss of $157.9 million. Traders looking to short the two meme stocks after their recent rallies should tread extremely carefully given AMC and GameStop's share prices have been completely detached from the values of their underlying businesses since the beginning of the initial meme stock bubble in early 2021.
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