With the pandemic boom fading fast in the rear-view mirror, given the macroeconomic and market conditions, it could be wise for existing investors to jettison fundamentally weak meme stocks GameStop Corp. (GME), AMC Entertainment Holdings Inc. (AMC), and BlackBerry Limited (BB).
A 1994 quote by the Oracle of Omaha, Warren Buffett, may have summed up 2022 for all of us, “You don’t find out who’s been swimming naked until the tide goes out.”
While virtually–free and easy money was gushing in through stimulus checks and (almost) zero-interest loans, fundamentally weak meme stocks were pumped up by unprecedented hype created by retail investors on social media forums.
However, with the tap turned off and interest rates progressively ramped up, those stocks were getting cheaper while goods and services all around were getting costlier.
In strange but vaguely familiar circumstances, when even banks cannot be wholly and unconditionally banked on, even mild and planned interest-rate hikes by the Federal Reserve could compound the perils of these struggling businesses.
Let’s take a closer look at the featured stocks.
GameStop Corp. (GME)
GME leverages its e-commerce properties and stores to offer games, entertainment products, and technology. The company operates through four geographical segments: the United States; Canada; Australia; and Europe.
On September 7, GME announced its partnership with FTX US to introduce more of its customers to the latter’s community and its marketplace for digital assets. Within two months of the announcement, the cryptocurrency exchange collapsed due to a liquidity crisis of the company's token, FTT.
For the third quarter of the fiscal year 2022 ended October 29, 2022, GME’s net sales decreased by 8.6% to $1.19 billion. During the same period, the company reported an adjusted operating loss of $95 million and an adjusted net loss of $93.4 million, or $0.31 per share.
GME’s trailing-12-month EBITDA and net income margins of negative 7.33% and negative 8.54% squarely miss the respective industry averages of 11.51% and 4.62%. Also, its trailing-12-month ROTC of negative 33.92% compares unfavorably with the industry average of 11.05%.
Ahead of tomorrow’s earnings release, analysts expect GME’s revenue for the current fiscal year (ended January 2023) to come in at $5.88 billion, down 2.2% year-over-year. For the same period, the company’s loss per share is expected to widen by 15.2% year-over-year to $1.31.
Moreover, GME has missed the consensus EPS estimates in three of the trailing four quarters and is expected to keep reporting losses over the next two fiscals. GME’s stock has slumped 22.5% over the past month and 42.7% over the past six months to close the last trading session at $16.60.
GME’s POWR Ratings reflect its bleak outlook. It has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
GME has an F grade for Value and a D for Stability, Momentum, and Sentiment. As a result, it is ranked 42 of #44 stocks in the Specialty Retailers industry. Click here for additional POWR Ratings for GME’s Growth and Quality.
AMC Entertainment Holdings Inc. (AMC)
As a theatrical exhibition company, AMC owns, operates, and has interests in theaters in the United States and worldwide. The Company operates through two segments: U.S. markets and International markets.
On March 14, AMC announced that its shareholders had approved its twin proposal of issuing additional shares and a reverse split. While, at 88% and 87%, the participating shareholders have voted overwhelmingly in favor of the proposals, these proposals also reflect the company’s pressing need for capital.
With debt financing getting more expensive amid increasing interest rates, AMC had to resort to diluting the holdings of existing shareholders by issuing fresh shares. The reverse split appears to be a preemptive move against a major devaluation of existing shares that might result from its decision to raise capital by issuing additional shares.
On February 6, AMC announced Sightline, a program that offers moviegoers differential pricing for seats based on sightlines to the movie screen. The seats would be priced in the following segments: Value Sightline, Standard Sightline, and Preferred Sightline.
While this initiative would help provide more value to its customers, it does little to address the broader issue of the preference of the majority of customers shifting from going to the theater for movies to streaming them from the comfort of their homes.
On December 22, 2022, AMC announced a $110 million equity capital raise by selling AMC Preferred Units (APE) to Antara Capital, LP, at a weighted average price of $0.660 per share. The company also sought a special shareholder meeting to vote on its proposal to convert APE units into AMC common shares and reverse-split the number of AMC common shares at a 1:10 ratio.
The announcement closely followed AMC’s December 19 announcement that it had raised $162 million of equity capital through sales of 125.9 million AMC Preferred Equity Units.
With the Federal Reserve aiming to control inflation by restricting liquidity and consequently slowing discretionary expenditure, benefits of such additional investments are not expected to accrue to shareholders anytime soon.
For the fourth quarter of the fiscal year that ended December 31, 2022, AMC’s revenue declined 15.4% year-over-year to $990.9 million, while its adjusted EBITDA plummeted 90.9% year-over-year to $14.5 million. As a result, the company’s adjusted net loss widened by 167.3% and 133.3% year-over-year to $152.9 million and $0.14 per share, respectively.
AMC’s trailing-12-month EBITDA and net income margin of 0.24% and negative 24.89% are remarkably underwhelming compared to the industry averages of 18.02% and 3.15%, respectively. Its trailing-12-month ROTC of negative 2.95% compares to the industry average of 3.54%.
Analysts expect AMC to report a loss of $0.43 per share during the fiscal ending December 31, 2023. Additionally, the company is expected to keep reporting losses over the next two fiscals.
The stock has plummeted 21.4% over the past month and 54.5% over the past six months to close the last trading session at $4.18.
Due to its weak performance, AMC has an overall rating of D, which translates to a Sell, in our POWR Ratings system. It has an F grade for Stability and a D for Quality.
AMC is ranked last of five stocks in the F-rated Entertainment– Movies/Studios industry. Click here to see additional POWR Ratings for Growth, Quality, Sentiment, and Momentum for AMC.
BlackBerry Limited (BB)
Based in Waterloo, Canada, BB provides intelligent security software and services to enterprises and governments globally. The company operates through three segments: Cybersecurity; IoT; and Licensing and Other.
On March 6, BB announced its preliminary and full fiscal year 2023 results. The company expects its revenue to come in at $151 million and $656 million for the fourth quarter and fiscal year 2023, with the latter below Street expectations of $665.01 million.
While the IoT business' performance is expected to align with the outlook previously provided, the top line of the Cybersecurity business is expected to be lower than the outlook provided during the Q3 FY23 earnings call. Certain large government deals under negotiation did not close during the quarter but rather slipped into the fiscal year 2024, causing a significant impact on the in-quarter revenue recognition.
During the third quarter of the fiscal year 2023, which ended November 30, 2022, BB’s revenue decreased 8.2% year-over-year to $169 million. During the same period, the company reported adjusted operating and adjusted EBITDA losses of $28 million and $22 million, compared to respective losses of $24 million and $8 million during the previous-year quarter.
As a result, BB’s adjusted net loss for the quarter stood at $30 million compared to an adjusted net loss of $1 million during the previous-year quarter.
BB’s trailing-12-month EBITDA and net income margin of negative 13.19% and negative 13.77% stand out in stark contrast to the respective industry averages of 9.87% and 2.70%. Its trailing-12-month ROCE of negative 6.94% compares unfavorably to the industry average of 3.67%.
As mentioned earlier, analysts expect BB’s revenue to decrease by 7.4% year-over-year to $665.01 million in 2023. During the same period, its loss per share is expected to widen 113.9% year-over-year to $0.23. The stock has plummeted 10.4% over the past month and 35.2% over the past six months to close the last trading session at $3.72.
BB’s bleak outlook is reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. It also has a D grade for Stability, Sentiment, and Quality.
BB is ranked #47 of 49 stocks in the Technology - Communication/Networking industry. Click here to access the additional ratings for Value, Momentum, and Growth of BB.
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
Yes, some special stocks may go up like the ones discussed in this article. But most will tumble as the bear market claws ever lower this year.
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GME shares were trading at $16.87 per share on Monday afternoon, up $0.27 (+1.63%). Year-to-date, GME has declined -8.61%, versus a 2.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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