The video game retailer and the cinema chain are both good at entertaining people, but they have more in common than just that.
GameStop (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC) are paired by investors like the salt and pepper shakers on the dinner table. In recent months, the two consumer staples stocks have seen rapid price movement. The stocks have risen or fallen by 50% or more more more than a few times in a single day. Normally, an up or down move of this magnitude is a rare event.
GameStop and AMC are in different businesses. GameStop is a video game retailer that specialises in offering customers the opportunity to buy and sell used games. By comparison, AMC brings people together in one of its more than 1,000 movie theatres to see box office hits on a big screen with the latest technology. But their share prices experience similar volatility.
So what does a video game retailer have in common with a movie theatre chain?
1. A buying frenzy fuelled by a Reddit group.
GameStop and AMC are best known as part of a buying frenzy sparked by a discussion on the Reddit forum r/WallStreeBets. The group is targeting stocks where a high percentage of shares are sold short. Short selling allows you to profit when the price of the stock falls, and the Reddit group’s goal is to trigger a short squeeze. This creates a strong buying momentum that overwhelms the short sellers and forces them to close their short positions – leading to a rise in the share price.
The strategy seems to be working, as both stocks have risen by large amounts since the buying began a few months ago, even though their business prospects have not improved enough to justify the price increases.
2. Negatively impacted by the COVID-19 outbreak.
When the COVID-19 pandemic broke out, GameStop and AMC each had to close all their shops to in-person customer traffic. Fortunately, GameStop has a thriving e-commerce business that compensated for some of the losses due to the absence of in-person customers. AMC was not so lucky. All shops had to close and without a compensating business, the cinema chain started to bleed.
However, the number of people infected, hospitalised and dying from COVID-19 is declining worldwide. And with over 90 million doses of vaccine administered in the US, states are beginning to loosen restrictions on businesses. New York, for example, announced that it will allow cinemas to reopen (with limited capacity). California will allow theme parks and some sports stadiums to reopen. And Texas announced that it will lift all restrictions on shops from 6 March.
GameStop and AMC suffered sales and profit losses when the Corona virus devastated shops and livelihoods. The video game retailer and cinema chain are now cautiously optimistic that their businesses can return to some degree of normalcy as the world recovers from the devastating virus.
Still, the pandemic will leave a lasting impression on both. Studios like Disney (NYSE:DIS) are releasing new blockbuster movies simultaneously or exclusively on a streaming platform, which could reduce cinema attendance. And video game makers are shifting game sales to digital channels, reducing the need to visit a brick-and-mortar retailer like GameStop. If you want to grow your wealth over the long term, there are better stocks than GameStop or AMC.