Conventional wisdom says that when a public company’s stock is overvalued, that company should issue new shares. In doing so, the company raises funds before the share price falls. Last year, Tesla rode just such a wave of investor enthusiasm to raise $12 billion in 2020.
Now it’s AMC Entertainment’s turn. Riding its meme-fueled success on Reddit this year, the movie theater chain issued a glut of new shares. While stock issuances typically dilute share price, remarkably, AMC issued more than 100 million new shares without breaking stride: the stock price is now 23 times higher than it was at the start of 2021.
That money may finally be running dry. AMC faces a roadblock as the company’s corporate charter only allows it to issue 524 million shares of common stock. With 513 million shares outstanding, AMC can only issue 11 million new shares before hitting its self-imposed ceiling. To get around the barrier, CEO Adam Aron has asked shareholders to approve 25 million new shares.
Normally, this would not be a big ask, especially if Wall Street agrees that a stock is overvalued. Retail investors seldom have any say because institutional investors are often in control. In the US, the 10 largest institutional investors, like hedge funds or endowments, make up 43% of the average public company’s ownership. Retail investors’ voting power retail is typically so diluted that it rarely factors into management decisions.
Not this time. Retail investors, who led AMC’s recovery in recent months, hold more than 80% of the company’s shares, dwarfing the stakes of institutional investors. Many of them are activist investors themselves who organized on Reddit communities, called subreddits. And these investors appear to have assumed decisive control over the company’s decisions.
Meme traders voiced their opposition on Reddit to the new stock issuance to execute another short squeeze and drive the price up higher. They think that short-sellers on Wall Street will soon have to buy back their shares for a loss, driving the price even higher.
A typical company might brush off such demands. But Aron conceded to Reddit traders’ wishes on Tuesday. The AMC CEO openly acknowledged the retail investors’ desires, tweeting that he didn’t want to proceed with “split” shareholder sentiment by asking for the vote, a vote he likely would not win since all shareholders can (and perhaps will) vote their preferences online:
Such a concession signals a major change in AMC’s corporate trajectory—and perhaps for other corporations now in thrall to retail investors like never before. For a few high-profile stocks, historic roles have reversed: Individual traders coordinating online, armed with commission-free trading accounts, can supersede the wishes of management and institutional investors.
GameStop and AMC have been the prime beneficiary of the meme stock craze. Retail investors, operating largely on Reddit and Discord communities dedicated to investing, pulled off a seismic feat this winter by orchestrating a series of short squeezes on ailing companies including GameStop and AMC.
The traders, who mostly gathered on the subreddit WallStreetBets and related Discord servers, felt the stocks were undervalued by Wall Street short-sellers. In a short squeeze, investors buy up stock, raising share price to the point where short-sellers — who are betting against the stock price appreciating — need to buy the stock to cover some of their losses, which can send the price even higher.
The two main beneficiaries of the meme stock craze have taken opposite approaches to capitalize on this. GameStop has always been coy about its success, vague about its corporate strategy, and loath to issue new shares. The video game retailer has only issued 3.5 million through a new offering in April—a measly figure compared to AMC’s 100 million new shares.
AMC has gone all-in on the meme. To capitalize on its retail investors, the company has issued new stock to boost its market cap from $5 billion at the start of April north of $22 billion as of Wednesday. For managers, this follows a common business-school logic. “If you believe your stock is overvalued and further you believe the bubble will eventually pop, then it absolutely makes sense to issue shares,” said Kelly Shue, a finance professor at Yale’s School of Management.
But it’s a brave new world for the company embracing its extremely online investors: The movie theater chain is now acting like a wholly-owned subsidiary of its own meme. Aron said last month that AMC has 4.1 million individual investors, who own up more than 80% of AMC shares, and the average investor owns 120 shares. It’s highly unusual for any public company to have so much of its stock in the hands of retail investors. “I’m shocked,” said Kevin Mullally, a finance professor at the University of Central Florida. “That is not normal.”
With this growing investment comes growing influence. Mullally said that AMC likely pulled the shareholder vote because it didn’t have enough votes to win, or perhaps they want to appease the meme traders behind their success. For AMC that’s likely to be one and the same.
This trend only seems to be strengthening. The emergence of the trading app Robinhood, meme stocks, and a bull market have made 2021 the year of the retail investor. JPMorgan Chase predicts retail investors will pour a record $1 trillion into stocks this year, doubling an earlier estimate from December. And that was before WallStreetBets began making front-page headlines by sending GameStop’s stock skyward.
This army of activist investors is now waiting to execute another short squeeze. Posters on Reddit’s r/WallStreetBets and r/AMCStock are lobbying AMC to stop issuing new stock to increase their leverage over any short investors (since new shares could dilute their leverage). Once some shorts start buying back shares, that can have a cascading effect where the price climbs and more shorts need to buy more shares to cover their position, pushing the price higher still.
“The only way [the shorts] cover is if people sell their shares,” said Reddit user Tynore on Wednesday morning, July 7, urging fellow traders to hold. “We own the float. We set the price. Current price doesn’t matter.” (The float is the total number of shares available for trading.)
Aron is clearly listening and speaking directly to the concerns of his Reddit investors. “These individual investors likely own a majority of our shares,” he said during AMC’s earnings call in June. “They own AMC. We work for them. I work for them.”
When Aron decided to withdraw the stock issuance vote, the AMCStock subreddit applauded the decision. Bullish retail investors on Reddit forums, who call themselves “apes,” call CEO Adam Aron their “silverback” (the name for a dominant male gorilla). “For any apes that did not believe in our silverback or questioned his loyalty i think all those have been answered and there is absolutely no reason to doubt AA..,” wrote Reddit user 1Goalie29. “AMC as a company..onward and upward ..AMC APES TOGETHER STRONG 🚀 🌙”
Reddit investors’ strategy is now to wait, but Aron wants to grow AMC. For that, he needs capital. The CEO is eyeing acquisition targets including ArcLight and Pacific theaters, paying off corporate debt, showing live events like UFC fights, and offering an investor program with complimentary popcorn as it raises more money.
Conventional wisdom dictates AMC and its investors should all want the company to issue more shares, but meme traders’ strategy — forcing another short squeeze against Wall Street investors through collective action — is blocking the CEO’s ability to fundraise. Even if meme traders understand the company is overvalued, most don’t seem to believe that the price will drop anytime soon. “In the short term, issuing shares makes it harder for Reddit and other meme traders to coordinate the short squeeze,” Shue said. “They’re not worried about the bubble popping and, in that case, there’s no strong reason to issue shares.”
But AMC’s stock price is slipping, down 20% in the last five days of trading, and meme traders are urging fellow investors to “hold the line” and “buy the dip.”
And it’s unclear if there will be a short squeeze on the horizon. As of June, about 20% of shares available to the public are being shorted. While that has been rising since February, it’s down from a peak of 24% in January and nowhere near the 102% short interest in GameStop in early January that catalyzed WallStreetBets’ notorious short squeeze. Mullally at the University of Central Florida doubts traditional short investors — wary of another GameStop saga — would try the same maneuver given the fate of Melvin Capital. After its tumultuous short squeeze, the hedge fund lost 49% on its investments during the first three months of 2021, Reuters reported.
Today, short-sellers fearful of meme mania realize they are outnumbered by coordinated retail investors. “Just like with GameStop, the retail guys can keep buying the stock and thus push up the price,” said Mullally. “There are so few available shares for the shorters to buy that they simply won’t take the risk of getting squeezed again.”