What happened
Shares of GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) surged 52% and 21%, respectively, Thursday, helping them recover a significant portion of their recent losses.
So what
GameStop's stock shed a third of its value Wednesday after the video game retailer's fourth-quarter revenue and operating profits fell short of Wall Street's expectations. Analysts were also miffed that GameStop failed to offer much insight into its digital transformation plan and declined to take questions during its earnings call.
AMC Entertainment was likewise down sharply earlier this week, following news that Walt Disney would make two of its upcoming movies available on its popular Disney+ streaming service the same day they begin showing in theaters.
Traders piled back into GameStop and AMC Entertainment Thursday. Image source: Getty Images.
Some investors apparently felt the sell-off was overdone. Bulls no doubt took heart in Jefferies Financial Group's massive price target hike for GameStop's stock. Analyst Stephanie Wissink boosted her share price forecast more than tenfold from $15 to $175. Wissink posited that GameStop would successfully transition its business away from its brick-and-mortar stores to a primarily e-commerce model, while also seizing opportunities in esports and collectibles.
It should be noted, however, that GameStop hired Jefferies to assist with a potential share offering. Jefferies also owns a significant portion of GameStop stock. Still, investors bid up GameStop's shares to $183.75, or within about 5% of Jefferies' new target price.
Seeing GameStop rally likely also helped to boost the sentiment for AMC among traders on Reddit and other social media sites. Many individual investors have tried to coordinate their stock purchases on these sites in recent months, which has helped to fuel violent price swings in GameStop, AMC, and other so-called meme stocks -- companies that have had their shares hyped on the internet -- both to the upside and downside.
Now what
By bidding up their stocks so sharply, investors are betting that GameStop and AMC will not just survive, but thrive, in a post-pandemic world. Yet GameStop's stores still face an existential threat from video game downloads, while rapidly growing streaming services like Disney+ threaten the long-term survival of AMC's theaters. Thus, despite today's rally, both GameStop and AMC remain high-risk investments.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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