A lot of money was made this year by buying shares of questionable value. Actions of GameStop (NYSE: GME), AMC (NYSE: AMC), and MicroStrategy (NASDAQ: MSTR) delivered impressive returns, up to 900%, 360% and 80%, respectively, in 2021.
My advice: leave while you still can. There is simply no good reason to invest in any of these low quality companies.
Image source: Getty Images.
GameStop
Video game retailer GameStop’s stock soared earlier this year in the euphoria fueled by Reddit. Then it fell and is now rising again. The company is valued at about $ 13 billion, despite a doomed business model and little chance of recovery.
The problem with GameStop is that it makes money selling used games, and the concept of a used game will become a thing of the past as games are increasingly purchased digitally. GameStop sells many game consoles and new games, especially when new game consoles are released, but these are low-margin products.
Based on the latest numbers from GameStop:
- The new gaming hardware carries a gross margin of just over 10%.
- The new game software has a gross margin in the range of 20%.
- Used games have a gross margin of more than 40%.
GameStop, as a business, just doesn’t work without used games. Sales of used games have been declining for years, and this trend is likely to continue as more people buy games directly from their game consoles.
Switching to e-commerce will not fix GameStop’s low margins on new video game products, and there is a lot of online competition from companies like Amazon, Best buyand other large stores. The company could sell new shares at inflated prices to raise cash, which will give it more time to think about something. But this is not a very convincing investment thesis.
GameStop’s shares certainly made impressive gains this year, but those gains are not supported by anything.
AMC
The AMC theater chain has also been swept away by the Reddit euphoria, dramatically increasing shares this year, despite a debt-laden balance sheet and enormous uncertainty about the future of the cinema industry. The pandemic has accelerated the shift to streaming, with companies like Disney and ATTfrom WarnerMedia reducing its reliance on cinemas for its main releases.
AMC’s revenue fell by almost 80% in 2020 due to the pandemic. The company reported a negative free cash flow of more than $ 1.3 billion in the year as it was forced to close its doors due to the increase in the pandemic. Most of AMC’s home theaters have reopened, but it may take a while for ticket sales to return to pre-pandemic levels – if they ever will.
AMC had about $ 6 billion in debt on the balance sheet at the end of 2020 and paid more than $ 300 million in interest on that debt over the year. The company was not profitable in 2019, before the pandemic hit, because of excessive interest payments.
It is possible that AMC will be able to eliminate a considerable part of its debt by taking advantage of the inflated price of its shares and selling new shares. This will certainly save the company time, but it does not solve any of your problems. The movie industry is unlikely to look the same as it did before the pandemic. AMC could not make a profit then; it is unlikely that you will be able to make a profit now.
Of course, the stock could do almost anything in the short term. But in the long run, I don’t think it’s worth much.
MicroStrategy
If you want to invest in Bitcoin, buy Bitcoin. Personally, I don’t think cryptocurrency makes sense as an investment, but many smart people disagree.
If you want to invest in Bitcoin and at the same time own a part of a declining software company, you can invest in MicroStrategy. The company has been buying Bitcoin by hand, acquiring more than 90,000 Bitcoins valued at more than $ 5 billion today. It is even issuing debt just to finance its Bitcoin purchases.
MicroStrategy’s stock has soared this year, thanks to this Bitcoin-centric strategy, although it has reduced some of those gains. One problem is that the underlying company has no reason to write. Revenue fell slightly in 2020, and the company reported a small net loss. What’s worse, revenue has been declining for years.
Issuing debt to buy Bitcoin will seem like a genius move if Bitcoin’s value continues to rise in the long run. The fact that MicroStrategy’s business isn’t very attractive doesn’t matter. But if Bitcoin is a massive bubble and the price collapses, it will look extremely foolish and may well condemn the company.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.