AMC: A Short Story

On March 15, 2021, a senior hedge fund analyst was tasked with formulating an investment thesis for AMC Entertainment (AMC). The stock had been highly volatile as the US economy emerged from the COVID-19 pandemic and markets grappled with the pandemic's impact on future consumer behavior. AMC's stock price, which had slumped from $7 to $2 at the onset of the pandemic and had been hovering around $4 for months, had skyrocketed to nearly $20 in a few trading sessions in January 2021.There were compelling arguments both for betting on AMC appreciating even further and for betting on its demise. On one hand, investor optimism about the cinema chain was understandable: vaccines were rolling out, and markets were confident in the US economy's swift return to normalcy. On the other hand, even in the most optimistic scenarios, the $14.04 price at which AMC traded on March 15, 2021, seemed far removed from the company's fundamentals. To complicate matters, the presence of retail investors betting on “meme” stocks added significant volatility to select stocks, including AMC.This public-sourced case uses fundamental analysis as a starting point for students to explore the mechanics, costs, and risks of short investing strategies. It has been successfully taught at the University of Virginia Darden School of Business in the “Enterprise Valuation” module of “Financial Management and Policies,” a first-year core course in the MBA program. The case has also been used in the first- and second-year elective, “Valuation in Financial Markets.” Since the case covers both valuation methodologies and option pricing, it has also served as a capstone for the first-year core finance course.<p>Excerpt</p><p>AMC: A Short Story</p><p>On March 15, 2021, Ruth Karasu, a senior analyst for EDN Management's Gallatin Fund (Gallatin), a midsize hedge fund, was in her makeshift work-from-home office, looking incredulously at the share price of AMC Entertainment Holdings, Inc. (AMC). She had been tasked with assessing how the fund could profit from the recent wild moves in the stock price of the country's largest cinema company. The lockdown orders of March 2020 had forced AMC to shut down its theaters, causing its stock price to drop from $7 to an all-time low of $2 per share. Less than a year later, however, AMC's price had soared to new heights: it registered the single largest one-day gain in its almost-10-year history of being a public company on January 27, 2021, when the price jumped 301%, from $4.96 to $19.90, and it was still trading at twice its pre-COVID level on March&nbsp;15, at $14.04 (Exhibit&nbsp;1).</p><p>As AMC was a company whose business relied on in-person experiences, its valuation would soar in the middle of a global pandemic only if its future fundamental revenue drivers shifted significantly. Karasu thought the stock-price numbers might reflect a market increasingly optimistic about future cinema attendance and a swifter-than-expected return to normalcy. The latest statistics on vaccine rollouts Karasu had gathered pointed in that direction, showing an acceleration in pace, with 125&nbsp;million doses administered in the three months since the beginning of the year. The newly immunized public was ready to spend: just a few days before, Barclays Bank Plc (Barclays) CEO Jes Staley had compared the pent-up demand in the global economy to that following the end of the 1918 flu. Perhaps the “roaring '20s” were likelier than Karasu had originally thought.</p><p>The recent spikes in AMC's stock price might also be driven by a less rational explanation. Just a few months earlier, in January 2021, the market had marveled at the stock price of Gamestop Corp. (Gamestop; stock trading symbols: GME), which had skyrocketed “to the moon,” as the online traders who fueled the price hike often put it. These day traders bought the stock in a frenzy, having coordinated in an obscure online community board to increase the video game retailer's price and drive hedge funds out of business. The fact that the stock prices of AMC's competitors had not increased nearly as much as AMC's had (Exhibit&nbsp;1) suggested that this “retail traders” explanation could be a possibility.</p><p>. . .</p>