Meme stocks took center stage on Wall Street in 2021. Financially and operationally troubled names like GameStop (NYSE:GME) and AMC Entertainment Group (NYSE:AMC) caught the attention of a group of small retail traders who targeted them in attempts to create short squeezes. Their social media-powered campaigns to act as a group and buy the heavily shorted stocks initially worked, at times, even boosting the share prices of GameStop and AMC by more than 1,000%.
So far in 2022, GameStop and AMC are down by double-digit percentages. So it may not be wise to invest in either of these companies, which are delivering poor operating performances and trading at still-expensive valuations -- but if you wanted to buy one anyway, which meme stock would be the better pick?
The case for GameStop
GameStop's troubles did not start with the pandemic. The video game retailer was too slow to adapt to the changing gaming industry and shifting consumer habits. It sells physical copies of games for consoles and PCs. Meanwhile, these titles are now readily available for download at the same price, so gamers have little reason to leave their homes and travel to GameStop stores. The convenience factor is even more of an issue given the share of the younger gaming demographic -- especially those below 18 years of age -- who may not have the ability to drive to a retailer.
Between 2016 and 2019, GameStop's operating income fell from $653 million to $314 million. Then came the coronavirus pandemic, and in the nine months that ended Oct. 30, 2020, the company reported an operating loss of $202 million.
Now, it's true that management is taking steps to improve its performance. The company has permanently closed 449 stores since October 2020. GameStop had 4,816 locations as of February 2021 across the U.S., Canada, Europe, and Australia.
All of those locations create a high expense base that will leave the company reporting losses on the bottom line for several more quarters, at least. Fortunately for its shareholders, GameStop has $1.4 billion in cash on its balance sheet and only $44 million in long-term debt. Financially, it should have enough cushion to get it through its strategic pivot as it keeps closing locations and lowering expenses.
The case for AMC
AMC, too, was a troubled business even before the pandemic devastated its operations. Before 2020, the company had lost money in four of the previous nine years. Watching movies in theaters has become progressively less appealing to people as the rise of streaming services and rapid innovations in TV screen technology have made at-home viewing an increasingly attractive alternative.
Meanwhile, AMC didn't offer its guests much in the way of an improved experience, and it kept boosting prices on tickets and concessions. For example, in Los Angeles, a movie ticket, a bucket of popcorn, and a soda could set you back by $36. So it's little wonder customers are shunning the multiplex in favor of a Netflix subscription. And now, not only must AMC contend with increasingly strong substitute entertainment options, it must deal with the fact that pandemic-related fears are still depressing box office numbers, too.
For the first three quarters of 2021, AMC reported a net loss of $1.1 billion, an improvement from its loss of $3.6 billion during the same period of 2020. But unlike GameStop, which has a relatively clean balance sheet, AMC has $5.4 billion in long-term debt and only $1.6 billion in cash. As such, AMC does not have the same luxury of time that GameStop does.
The verdict
While both AMC and GameStop are risky investments with high stock prices and poor prospects, if you must choose one of them to buy, it should be GameStop. The niche retailer's balance sheet, after all, is in much better shape, which will give it more time to cut its expenses and change course in hopes of stemming its losses.