Valuation as a Meme
Can we finally put to bed the quaint notion that the stock market is even remotely a barometer of the value of a firm based upon its revenues, profits, growth, and risk-return fundamentals?
The newest meme stock is AMC Entertainment. You know, the movie theater chain that in the wake of COVID posted more than $1.8B in losses? The company whose future is very much unclear now that the likes of Netflix, Amazon, Hulu, HBO Max, Disney, and others have made first run premiers at home a thing? Yeah, that AMC.
But now, fueled by Red Bull dusted with Cheetos powder and using the vast social networks to recruit an army of buy and hold traders bearing Robinhood accounts, in just a few short weeks, the “Wall Street Bros” have pumped up AMC stock to a market cap approaching $30B. A market cap around seven times greater than its quarter ending high since 2013 (reached in 2017), and thirty times greater than its average quarter ended market cap before the pandemic.
According to DealBook’s Andrew Ross Sorkin in his June 6th column,
“When stock prices are divorced from fundamentals, it cements the public perception that markets can be manipulated — by a small group of insiders or a large group of determined traders — and therefore can’t be trusted. That could have long-term implications beyond what happens with AMC, GameStop or any other stock in the headlines.”
I guess now when we value our clients’ businesses, in addition to methods such as Discounted Cash Flow, Capitalization of Earnings, Market Comps, and the like, we can add the Bros and Tweets Social Hyped Internet Troll approach.
The acronym is up to you.