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Which stock should you hold?

GameStop (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC) are among the companies that have run into trouble and are experiencing a short squeeze. Both have posted insane returns in recent weeks, and both are terrible investments. Here’s why.

A tough year and a tough environment for AMC.

Cinemas are struggling with the COVID-19 pandemic. Some of AMC’s cinemas remain closed while others are under severe capacity constraints. As a result, the company’s financial performance has been underwhelming to say the least.

In the first nine months of 2020, AMC’s revenue slumped 73.2% year-on-year to $1.08 billion. Profitability also fell short of expectations. AMC’s operating margin deteriorated from 2.2% to around minus 290%, with the net loss widening.

At the onset of the pandemic, AMC struggled to keep its revenue growth positive, with several quarters of revenue declines. Moreover, the company’s pre-pandemic operating margin of 2.2% is hardly worth bragging about.

To make matters worse, the content suppliers that AMC relies on to run its business are starting to deliver their new content through direct-to-consumer (DTC) channels. Streaming providers realise that they can drive subscription growth by adding new movies to their services, which is not good for AMC.

Regardless of all the threats and poor financial performance, AMC’s market cap has increased 881% to $4.50 billion in 2021 alone.

Don’t gamble with GameStop

GameStop – a brick-and-mortar game retailer – has also experienced the short squeeze of its life. Its market cap has risen 1,630% year to date to $22.7 billion, while its financials have suffered just like AMC’s.

While gaming products like Microsoft’s Xbox and Sony’s PlayStation have thrived amid pandemic home orders, GameStop’s results have been underwhelming. Last quarter, sales fell 30.2% to $1 billion as the company reduced the number of shops by 11% to cut costs. The company’s operating margin fell from minus 3% to minus 6%, while cash flow from operations also deteriorated rapidly.

Notwithstanding all this, GameStop has massively outperformed the video game business in 2021.

Just like AMC, the company is not entirely to blame for the poor performance. But poor margins even before COVID-19 mean more permanent problems.

AT&T is cutting AMC out of the equation by releasing movies to HBO, and competitors like Microsoft are doing the same to GameStop with its online Game Pass.

Even if the pandemic continues to die down, there is little reason to believe that everyone will return to in-person shopping. Some will, some won’t, with those who stick permanently to DTC channels directly damaging GameStop’s long-term potential.

Say no to both

It’s hard to decide which investment is better between AMC and GameStop – both are bad. The price increases seem to be driven purely by short squeezes and have nothing to do with underlying fundamentals or prospects. Neither company is performing well and both have significant obstacles in the way of a longer-term recovery.

To put it simply, there are many better places to park your money than investing in these two beleaguered companies.

Source: (fool.com)