When shares of companies like Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) soar, it's not a particularly shocking event. Both stocks have performed extremely well during the pandemic and have a clear competitive advantage that lends to additional growth potential. But when shares of what would otherwise read like dying brands start to skyrocket, it's a very different story.
Such was the case this week when shares of both GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC) surged to unbelievable highs. In fact, GameStop shares gained 134% yesterday while AMC rose 301%. What gives?
The answer boils down to a phenomenon known as a short squeeze, and while this week's trading activity may have made some stockholders pretty wealthy, it's nothing for real estate investors to get too excited about.
How a short squeeze works
Investors who short stocks bet on their prices going down. But when demand for those stocks surges and investors are forced to buy more shares to cover their short positions, it can drive prices upward.
That's what happened with both GameStop and AMC. Both companies had a large percentage of shorted shares, and so traders recognized that and rushed to buy. The result? Short sellers got crushed, and stock prices climbed.
But there's a reason so many investors shorted those shares to begin with -- they didn't have a lot of faith in the companies behind them. AMC, for example, has been teetering on the verge of bankruptcy for months. And GameStop has been growing increasingly less relevant in the wake of digital video game downloads. As such, the jump in stock prices we saw this week isn't just an anomaly -- it's also highly unsustainable.
What does the stock surge mean for real estate investors?
In a nutshell, not a whole lot. AMC still has a world of struggle ahead. Though it recently managed to scrounge up enough cash to avoid bankruptcy and stay operational through mid-2021, capacity restrictions are hurting movie theater revenue in a very meaningful way. Throw in the fact that Hollywood production has been sluggish, leaving theaters with little new content to offer patrons, and it's clear that AMC is already in the process of fighting an uphill battle that may not end well.
GameStop isn't in a much better spot. Many have already likened it to Blockbuster -- a chain that once enjoyed success but grew overwhelmingly irrelevant in an age of digital content.
As such, real estate investors shouldn't celebrate this recent stock surge. If anything, they should brace for store and movie theater closings, and the subsequent hit to mall and shopping center real estate investment trusts (REITs) that could ensue.
That said, the outlook for AMC may be a bit rosier. If Hollywood picks up the pace on new releases and vaccines are rolled out quickly, the movie theater industry may be better positioned to stage a near-term recovery. And after months of being cooped up at home, movie fans may be eager to visit theaters rather than stream content in their living rooms.
But the end of the pandemic won't do much for GameStop. If anything, being able to leave the house more freely could result in a decline in video game sales, and even if that doesn't happen, in time, GameStop could become nothing more than a waste of real estate -- even if its stock price happens to say otherwise right now.