Reddit investors showed their strength in stopping AMC’s major vote – Quartz

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Conventional wisdom says that when the shares of a public company are overvalued, that company should issue new shares. By doing this, the company raises money before the stock price drops. Last year, Tesla rode such a wave of investor enthusiasm to raise $12 billion in 2020.

Now it’s AMC Entertainment’s turn. With the success of the movie theater chain on Reddit this year, the movie theater chain has released an abundance of new stock. While stock issuances usually dampen the stock price, AMC has issued more than 100 million new shares without breaking a step: the stock price is now 23 times higher than it was at the beginning of 2021.

That money may finally run out. AMC faces an obstacle in the way as the company’s charter only allows the company to issue 524 million shares of common stock. With 513 million shares outstanding, AMC can only issue 11 million new shares before it reaches its self-imposed ceiling. To get around the barrier, CEO Adam Aaron asked shareholders to approve 25 million new shares.

Normally, that wouldn’t be much in demand, especially if Wall Street agreed that the stock was overvalued. Retail investors rarely have any say because institutional investors are often in control. In the United States, the 10 largest institutional investors, such as hedge funds or endowments, make up 43% of the average public company’s ownership. The voting power of individual retail investors is usually so diluted that it rarely influences management decisions.

Not this time. Retail investors, who have led AMC’s recovery in recent months, own more than 80% of the company’s stock, dwarfing the shares of institutional investors. Many of them are activist investors themselves who have organized themselves into Reddit communities, called subreddits. It appears that these investors have assumed decisive control over the company’s decisions.

Meme traders have expressed their opposition on Reddit to the new stock issue to implement another short squeeze and push the price higher. They believe that short sellers on Wall Street will soon have to buy back their shares for a loss, driving up the price.

A typical company may ignore such demands. But Aaron agreed to the wishes of Reddit traders on Tuesday. AMC’s CEO publicly acknowledged the wishes of retail investors, tweeting that he did not want to move forward with “divided” shareholder sentiment by requesting a vote, a vote he likely won’t win given that all shareholders can (and will) vote. Online preferences:

Such a franchise signals a major change in tack for AMC—and perhaps for other companies that are now enslaved to retail investors like never before. For a few notable stocks, historical roles have been reversed: coordinating individual traders online, armed with commission-free trading accounts, can supplant the desires of managerial and institutional investors.

Sending AMC shares to the moon

GameStop and AMC were the first beneficiaries of the meme stock craze. Retail investors, who operate largely in the Reddit and Discord communities dedicated to investing, made a seismic feat this winter by orchestrating a series of short squeezes on struggling companies including GameStop and AMC.

Traders, who mostly gathered on the Wall Street Beats subreddit and related Discord servers, felt the shares were undervalued by Wall Street short sellers. In the short stress period, investors buy shares, raising the share price to the point where short sellers – who are betting on the stock price going up – need to buy the stock to cover some of their losses, which could drive the price up.

The two main beneficiaries of the meme stock craze have taken opposite approaches to capitalizing on it. GameStop has always been shy about its success, vague about its corporate strategy, and loath to issue new shares. The video game retailer issued just 3.5 million new shares in April — a minuscule number compared to AMC’s 100 million new shares.

AMC has gone all-in on the meme. To capitalize on its retail investors, the company issued a new stock to increase its market capitalization from $5 billion at the beginning of April north to $22 billion as of Wednesday. For managers, this follows a common business-school logic. “If you think your stock is overvalued, and you also think the bubble will eventually burst, it makes perfect sense to issue shares,” said Kelly Shaw, a professor of finance at Yale University School of Management.

Retail recovery

But it’s a brave new world for a company that embraces its very own online investors: The movie theater chain now operates as a wholly owned subsidiary of its meme. Aaron said last month that AMC has 4.1 million individual investors, who own more than 80% of AMC’s shares, and the average investor owns 120 shares. It is unusual for a public company to have so much of its stock in the hands of retail investors. “I was shocked,” said Kevin Mulally, a professor of finance at the University of Central Florida. “This is not normal.”

With this increased investment comes a growing impact. Mullally said that AMC withdrew the shareholder vote because it didn’t have enough votes to win, or perhaps they wanted to appease the doomed traders behind their success. For AMC, it’s probably the same.

This trend appears to be getting stronger. The advent of trading app Robinhood, meme stocks, and the bull market made 2021 the year of the retail investor. JPMorgan Chase expects retail investors to pump a record $1 trillion into stocks this year, double the previous estimate from December. And that was before WallStreetBets started making front-page headlines by sending GameStop shares sky-high.

This army of activist investors is now waiting to execute another short squeeze. Posters on Reddit’s r/WallStreetBets and r/AMCStock are pressing AMC to stop issuing new shares to increase its leverage over any short inventors (because new shares can dilute its leverage). Once some short positions start buying back the shares, this can have a cascading effect as the price goes up and more short positions need to buy more shares to cover their position, causing the price to go up.

“the only way [the shorts] Reddit user Tynore said Wednesday morning, July 7, he urged fellow traders to keep. “We own the float. We set the price. The current price doesn’t matter.” (The float is the total number of shares available to trade.)

Aaron clearly listens and speaks directly to his Reddit investors’ concerns. “It’s possible that these individual investors own the majority of our stock,” he said during an AMC earnings call in June. “They own AMC. We work for them. I work for them.”

When Aaron decided to withdraw the vote on the stock issue, the AMCStock subreddit applauded the decision. Rising retail investors on Reddit forums, who call themselves “monkeys,” call CEO Adam Aaron a “silverback” (the name given to a dominant male gorilla). Reddit user 1Goalie29 wrote: “For any monkeys who didn’t believe in silver or questioned its loyalty, I think all of those were answered and there is absolutely no reason to doubt AA..”. “AMC as a company.. upwards and upwards.. AMC works together strongly 🚀 🌙”

What awaits AMC

Reddit investors’ strategy is to wait now, but Aron wants to grow AMC. So it 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 investors a program with free popcorn as it raises more money.

Conventional wisdom dictates that AMC and its investors all want the company to issue more shares, but the meme-traders’ strategy — putting another short squeeze on Wall Street investors through teamwork — blocks the CEO’s ability to raise money. Even if meme traders realize the company is overpriced, most don’t seem to think the price will drop anytime soon. “In the short term, the stock issuance makes it difficult for Reddit and other meme traders to coordinate the short squeeze,” Shue said. “They are not worried about the bubble bursting, and in this case, there is no strong reason to issue shares.”

But AMC’s stock price is down, down 20% in the last five days of trading, and meme traders are urging fellow investors to “hold the line” and “buy the dip.”

It is unclear if there is a short squeeze on the horizon. As of June, about 20% of the stock available to the public has been sold. Although that has been rising since February, it is down from a peak of 24% in January and not near the 102% of short interest at GameStop in early January that motivated the infamous short squeeze of WallStreetBets. Molly at the University of Central Florida suspects that traditional short investors — worried about yet another GameStop saga — will try the same maneuver given the fate of Melvin Capital. After a turbulent short squeeze, the hedge fund lost 49% of its investment during the first three months of 2021, Reuters reported.

Today, short sellers frightened by meme-mania are realizing that they are outnumbered by coordinated retail investors. “Just as with GameStop, retail traders can continue to buy shares and thus raise the price,” Mullally said. “There are so few stocks available for short holders to buy that they simply wouldn’t risk being pressured again.”

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