What happened
Shares of meme stocks AMC Entertainment Holdings (AMC -4.01%), fuboTV (FUBO -1.58%), and SmileDirectClub (SDC 6.79%) were big winners this week. Through Thursday trading, they rose 14.8%, 27.4%, and 20%, respectively.
Big bounces can happen when your stock has been beaten down and is heavily shorted, as these three were. Even after this week’s gains, AMC Entertainment is down 25% over the past year, with 18.4% of its stock sold short as of July 15. SmileDirectClub is down 74%, with 21% of its shares sold short. Meanwhile, fuboTV is down 87%, with nearly 30% of shares sold short.
Two kinds of catalysts likely fueled this week’s rally. Positive macroeconomic news may have caused shorts to cover, while drawing in retail investors to speculate in more risky names. Additionally, company-specific developments for all three companies may have fueled above-average gains.
So what
On the macroeconomic front, Wednesday’s Consumer Price Index (CPI) report showed lower-than-feared inflation for the month of July. Many took the numbers as a sign that the post-pandemic inflation fever may be breaking. After all, this was the first monthly report in a long time that showed no month-over-month inflation.
When fears of inflation recede, stocks go up — but economically sensitive, beaten-down, and riskier stocks usually go up by much more. That includes meme stocks like these three.
Marketwide factors aside, all three companies recently reported earnings: SmileDirectClub reported this week, and fuboTV and AMC did so last week.
Did they report good numbers? No. In fact, all three stocks missed analyst revenue estimates. And all three showed operating losses, although AMC and Fubo did report better losses than anticipated.
That doesn’t really seem like a recipe for big stock gains. However, market sentiment is now focused on what could go right, and each company did announce some interesting new business developments.
AMC Entertainment Holdings
On its earning call last week, AMC announced it would issue current shareholders a special dividend consisting of one new preferred stock unit, which will trade under the ticker symbol “APE” and come with a non-fungible token (NFT).
This is somewhat strange, considering it’s not clear what value would be ascribed to the new preferred unit versus the common stock. Still, the preferred unit will begin trading on Aug. 22, so some may have been buying AMC this week in anticipation of the preferred stock dividend.
Why create a new preferred stock class? Unfortunately, it doesn’t seem to be for a great reason. AMC management had promised its shareholders last year that it wouldn’t issue any new shares and dilute the stock further, after a series of equity raises in 2020 and early 2021 to get through the pandemic.
However, it looks as though AMC wants to raise more money, and can get around this constraint by issuing preferred shares, then raising more money by selling more of the preferred share class. It appears management is attempting to appease common stockholders by giving them preferred shares ahead of a possible capital raise — although no one has any idea of the price at which AMC will issue the new preferred units, or how much common stockholders may ultimately be diluted.
fuboTV
Meanwhile, fuboTV had two big pieces of content-related news this week. In one, SportsGrid Network, the nation’s first 24/7 streaming network dedicated to sports wagering, announced that it would launch on fuboTV. This came after Fubo’s earnings report last week, in which the company announced it was putting its own sportsbook unit up for “strategic review.” However, it appears Fubo is still leaning into sports wagering, just not pursuing this costly endeavor itself.
That bit of positive news followed Monday’s announcement of a multiyear first-look deal for unscripted content from Ryan Reynolds’ Maximum Effort production company. As part of the first-look deal, Fubo issued Maximum Effort $10 million worth of FuboTV common stock.
The two deals seemed to generate optimism that Fubo could attract differentiated content to its platform, and its stock soared as a result.
SmileDirectClub
Finally, SmileDirectClub was the only of the three to report earnings this week, and investors had a roller-coaster ride. The company reported second-quarter results on Tuesday night, showing misses on both revenue and net losses per share, while also lowering its full-year guidance.
The stock plunged on Wednesday, although that was the day of the CPI report, when the overall market soared. However, the stock then made a U-turn and surged nearly 25% on Thursday on no significant news. That was likely the result of a big short squeeze.
The short squeeze could have been mere profit-taking by short-sellers. It could also have been a reaction to management’s announcement of the new Smile Maker 3D scanning app, set to be unveiled in the fourth quarter or the first quarter of next year.
The AI-powered smartphone app will allow prospective customers to scan their mouths, then receive a detailed treatment plan. Currently, those customers either have to visit an approved dentist or a Smile Direct retail store, or make an at-home imprint to begin the process. So the new app — the result of years of development — could greatly streamline the process and lower customer acquisition costs.
Now what
There is a bull case to be made for each of these stocks, but the path is narrow. AMC Entertainment investors need to believe that movie theaters will continue to improve their finances as the economy reopens, but that’s pretty uncertain — some might say unlikely — in the age of streaming. The idea for a sports-focused online streaming bundle is gaining fuboTV subscribers off a small base, but it faces intense competition from larger, well-funded peers, such as Alphabet‘s YouTube TV. And SmileDirectClub is facing a difficult macroeconomic environment, as well as fierce legal resistance from state dental boards. More worrisome for AMC and SmileDirectClub, they each have problematic debt loads, which are huge risks in this rising interest-rate environment.
So even with these eye-opening moves this week, investors should be aware that none of the three stocks is “safe.” Despite still being well below their all-time highs, each remains a highly speculative investment.
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