“When I see meme stocks taking over again like GameStop and AMC, I have to remember it is irrational,” according to Mad Money’s host Jim Cramer.
- Jim Cramer questions the high valuations of GameStop and AMC, highlighting their shaky business fundamentals compared to peers like Best Buy, and advises investors to sell.
- GameStop, with fluctuating revenues and losses, and AMC, fighting bankruptcy through equity sales, both face significant financial challenges despite their meme stock status.
- Due to the influence of non-fundamental factors driving meme stock prices, shorting GameStop and AMC can be extremely risky and potentially harmful to short sellers.
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James J. Cramer, aka Jim Cramer, is a former hedge fund manager and co-founder of TheStreet, Inc. He hosts CNBC’s Mad Money.
This caricature of Jim Cramer was adapted from a Creative Commons licensed photo from Wikimedia.
Cramer on GameStop’s Stock
According to Jim Cramer, the host of CNBC’s Mad Money, the recent surge in the share price of video game retailer GameStop (NYSE:GME) —reaching up to $64 per share during the trading week that began on May 13—raised questions about whether the people trading millions of shares were aware of GameStop’s true business value, which he estimated to be around $20 billion.
Cramer suggested that the best way to assess the value of a company is by comparing it to a similar one. In his opinion, Best Buy is GameStop’s closest peer. He pointed out that Best Buy (NYSE:BBY) has a market cap of approximately $16 billion, which was lower than GameStop’s market cap at that time.
“GameStop’s revenues have bounced between $5 billion and $6 billion. In contrast, Best Buy did $43.5 billion in sales. How about earnings? GameStop has been losing mounds of money, making about $17 million last year. By contrast, even though Best Buy’s earnings have been declining, they still made $1.4 billion last year.” said Cramer.
He further argued that while GameStop might be on the upswing and Best Buy on a downward trend, they essentially have the same market capitalization. An electronics retailer like Best Buy should be generating more revenue than a game retailer. Additionally, Best Buy pays a generous dividend, whereas GameStop does not.
To conclude his comparison, Jim Cramer stated, “I do not see how these two companies, which do roughly the same thing, could be worth roughly the same price according to Wall Street, especially when Best Buy’s numbers are so much higher.”
Cramer’s final verdict, adopting a bearish stance on GameStop shares, was clear:
“I just can’t get $64, I can’t get $54, I can’t get even $44 for that. In short, what I see in GameSotp, the responsible move is to sell, sell, sell.”
Cramer on AMC’s Stock
When discussing another meme stock, AMC Entertainment (NYSE:AMC), which experienced a similar surge during the trading week of May 13, Jim Cramer saw the movie theater chain in a different light and labeled the stock as a “dead man walking.”
“GameStop at least has a good balance sheet,” said Cramer. In contrast, AMC could run out of money by 2026 when $2.8 billion of debt matures. The company’s recent equity sale, raising $250 million, only made it easier for the theater chain to pay off its debts due by 2025.
“If the stock keeps climbing and AMC can sell more stock, it’s good! It’s how these guys made it through the pandemic, but that big sum in 2026 is just way too daunting,” Cramer explained.
Despite AMC’s different situation compared to GameStop, Cramer’s final advice to AMC shareholders remained the same: “Sell it before the ‘dead man phase’, and you’ll do just fine.”
Follow Cramer’s Advice on Meme Stocks?
Jim Cramer holds a figurative title of “persona non grata” among retail investors loyal to GameStop and AMC. This is primarily because he has been bearish about these companies’ investment theses since 2021.
Arguably, Cramer’s points regarding the business fundamentals of GameStop and AMC are valid. The video game retailer has struggled to remain profitable, has declining revenues, and trades at a much higher valuation than its peers.
On the other hand, AMC continues to fight bankruptcy by selling as much equity as it can, diluting shareholders to maintain healthy liquidity.
There’s no doubt that both companies face an arduous road ahead to prove that their fundamentals are solid enough to justify their stretched valuation multiples.
However, to paraphrase Jim Cramer, at the end of the day, companies are worth what buyers are willing to pay. Considering that GameStop, AMC, and other meme stocks have buyers highly influenced by factors unrelated to business fundamentals, shorting such stocks can become a tremendous challenge for short sellers.
In short, I believe that shorting meme stocks is like playing with fire. It may be fun for some short sellers for a while, but eventually, they will get burned.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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