Enjoy the Party in AMC Stock, Leave Before Reality Check Happens

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May. 18 2021, Published 9:39 a.m. ET

Reddit group WallStreetBets is back with a vengeance. The ninja group, which almost led to the demise of Melvin Capital, seems to be targeting AMC Entertainment (AMC) stock again. AMC is trending in the subreddit, which is reflected in the stock price. What’s the prediction for AMC stock in 2021 and can it rise more on WallStreetBets' short squeeze?

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WallStreetBets triggered some of the epic shorts squeezes and successfully took on giant Wall Street hedge funds. The short squeeze in GameStop stock will go down as an epic short squeeze in history just like we saw with Volkswagen in 2008.

Why AMC stock is rising

There's optimism about reopening stocks since over a third of the U.S. population is fully vaccinated against COVID-19. Cinema chains like AMC are among the premier stocks to play the reopening story. To add to that the response, new releases have been good. AMC is also winning market share as some small cinema chains have closed theatres. 

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AMC stock short interest has risen

After the massive short squeeze in the first quarter of 2021, AMC stock short sellers were wary of taking new bearish bets against the company. However, since April, bears have been taking fresh short positions in AMC. The stock’s short interest was 17.5 percent as of April 30, which is the latest date for which we have the official filings.

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Is a short squeeze happening in AMC stock?

According to Fintel, AMC’s short interest has risen in May. The short interest was 24 percent as of May 17, which is a decline of 6.6 percentage points from the previous day. The steep fall in the short interest and a 7.5 percent rise in AMC stock points to a short squeeze.

AMC stock is up sharply on May 18 also, which could mean more pain for short-sellers. As more short-sellers cover up their positions to trim their losses, we could see its short interest fall even more. The short squeeze-driven rally could take the stock even higher.

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AMC stock price prediction 2021

According to the estimates compiled by TipRanks, AMC Entertainment has an average target price of $7.13. The average price prediction implies a 49 percent downside over the current prices. The stock’s highest target price of $16 is 14.7 percent upside potential. Among the six analysts covering the stock, only one has a buy rating, two have a sell rating, and three have a hold rating.

Is AMC Entertainment stock expected to go up more?

The bulls seem to have the upper hand for now. Apart from the short squeeze-driven rally, the setup is also positive for AMC stock. New titles might continue to get a good response in cinemas since there's genuine pent-up demand for outdoor entertainment. 

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However, the medium to long-term outlook looks less rosy than the short-term outlook. On one hand, we have increased competition from streaming, which is a long-term headwind for cinema companies. Also, while AMC raised a lot of equity and debt over the last year to bridge the cash burn, the extravaganza has to be repaid, and quite literally so.

As I noted in a previous article, AMC might need to post earnings higher than what it posted in 2019 to justify its valuations. The thesis looks weak considering the threat from streaming. While I'm a firm believer that streaming can’t match the moviegoing experience for everybody, it certainly can do so for some people. Overall, enjoy the short squeeze party while it lasts, but don’t forget to leave on time, otherwise you might get stuck with the stock at higher prices.

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