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AMC to the moon 🚀🚀
On Wednesday, Digital World Acquisition Company (DWAC) was $10 per share. That night, this SPAC announced that it was taking Donald Trump’s media group public. DWAC was $175 a share on Friday morning. Post-merger, this is a $33 billion valuation for a media entity that doesn’t even have a functional platform.
Why did this happen? Did the present value of future cash flows for DWAC increase 17.5x after the announcement? Not likely.
Welcome to the meme market: Everyone is a trader, FOMO is king, and no one cares about your valuations.
A Casino in Your Pocket
Placing a trade used to be a tedious process that involved manually calling a stock broker, naming the security and limit price, and waiting for it to execute. Placing a trade today consists of unlocking your phone, clicking on an application, and smashing the buy button.
Read about the GameStop short squeeze online? You can scratch that FOMO itch immediately by buying 100 shares. Lazy Sunday on the couch? Flip some cryptocurrencies. Bored at your remote job? Refresh your Robinhood account every 15 minutes.
In the past, the five minutes needed to contact your broker served as a barrier to impulse trading. You were less likely to succumb to a risky, ill-informed bet because 1) you had five minutes to think about it and 2) you had to tell someone else (your broker) the trade that you intended to make.
Mobile, commission-free trading removed this barrier. You can throw unlimited money at GameStop, Doge Coin, an NFT, or anything else that you want the second that you read about it.
Instant dopamine hit.
Now lock everyone in their homes for a year and a half with no outlets for entertainment. What do you think will happen? Welcome to the casino.
Twitter lets you search for stock tickers. Traders communicate over Discord servers 24/7. Dave Portnoy live streams himself day trading.
The Venn diagram of entertainment, communication, and investing was already consolidating as the digital world grew, but COVID-19 accelerated this trend.
Investing became entertainment. In a world with no sports and easy access financial markets, what greater venue for sports bettors to explore? In a world where the CEO of Tesla tweets that its “stock price is too high imo”, why wouldn’t everyone talk stocks online?
The AMC stock Reddit page has 500k subscribers.
Wallstreetbets has more people than New York City.
Elon Musk has more Twitter followers than President Biden.
Robinhood has more gamblers than Atlantic City.
These are million-member communities that use investing as a medium for entertainment. When investing, communication, and entertainment converge, a lot of money pours into a variety of assets for unconventional reasons.
When the market becomes a playground for all, gains take the backseat to games.
Best Story Wins, Truth Be Damned
When GameStop went nuts in January, a narrative about a “gamma squeeze” caught fire.
This idea was first mentioned in a wallstreetbets post over a year ago, and it garnered decent attention.
I recommend reading the entire post. Entertaining stuff.
However, Once GameStop’s stock started taking off, all of Twitter and Reddit bought into the gamma squeeze idea.
A gamma squeeze works like this:
Market makers (big institutions like Citadel) sell call options on stocks to provide liquidity for option traders. If the stock moves up past the option price, the market maker is liable to deliver 100 shares of stock per option, assuming the opposite party exercises these options. These market makers hedge this execution risk by buying shares as the stock rises. The higher the price, the more shares that are purchased. At the same time, traders will buy more call options to play the upward price movement. Which means market makers have to hedge even more. Which leads to more buying. Which further amplifies the price movement.
GameStop exploded from $20 to $500 a few months after that Reddit post, seemingly proving the wallstreetbets oracle correct. Except this gamma squeeze never happened.
The SEC conducted a detailed investigation of the GameStop incident last month, and in their remarks they noted no evidence of a proposed “gamma squeeze”. In fact, there was actually an uptick in put options, not calls.
The gamma squeeze was a false narrative that millions assumed was true, but it didn’t matter. A story sounds good, and the first wave of traders buys in. Then this story spreads to broader social media, and the stock is climbing, so retail investors around the world want to get in on the fun. So they buy shares and calls to fuel the gamma squeeze.
While the gamma squeeze never happened, the speculative wave of buyers who thought that it would happen was more than enough to send GameStop to the moon by itself.
Right outcome for the wrong reason. But the stock went up, so who cares?
Now replace gamma squeeze with “retail investors vs. the suits”. Many investors believe the market is unfairly stacked against them. GameStop was heavily shorted by institutions. Buying GameStop became a way to fight back against a rigged game. If some billionaires lose their shirts because they shorted 140% of GameStop’s shares, who cares?
A modern Robinhood story: stealing from the rich to feed the poor.
Next think we know, GameStop is a $22B company trading at $500 a share. Instead of selling, retail investors were buying even more. This wasn’t an investment in a company. This was retaliation against a broken system. A million-man digital army was out for blood, and they didn’t give a damn who stood in their way.
The irony of this story is that “the suits” made more off of the GME melt up than anyone else. But the stock went up, so who cares?
The beauty (and danger) of the internet is that stories can spread like wildfire, and stories tied to investable assets have real financial implications.
The real winners aren’t the investors who buy into the story. It’s the players that see the house of cards, but play it anyway because they realize other people are going to buy in.
Nikola Motors was an obvious scam, but the run from $10 → $94 on the back of “The next Tesla” narrative made life-changing money for some.
Trump’s “media company” doesn’t have a functioning platform. But how many of his supporters would pour their savings into their favorite president’s stock?
An actual slide from the investor presentation.
Good stories attract buyers. Great stories go parabolic. Broken stories destroy fortunes.
FOMO Doesn’t Care About Your “Valuations”
Investors have created dozens of ways to value a company. Price to earnings. Enterprise value. Market capitalization.
Valuation metrics are great when everyone uses valuation to make their investment decisions. What happens when market activity is driven by investors who couldn’t care less about valuation though?
Traders bought GameStop and AMC to “fight back against the suits”. It didn’t matter if the stock was $5, or $500. You think these guys ever researched AMC’s debt structure or cash flow from Q3?
Your friends bought GME at $20 and it went to $50. But they told you that it’s going to $1000, and you don’t want to miss out. Something about a gamma squeeze, retail finally winning, wallstreetbets, etc. So now you and the rest of your friend group ape into GME at $100. And then more and more people hear about it, and now Elizabeth Warren and Jim Cramer are discussing it on live TV. And everyone you know has made a killing on it, and all of their friends want to get in too.
Now imagine this happening on a global scale. None of these new buyers know anything about terminal value, discounted cash flows, or any other normal valuation metric. They know that if they buy these three letters, they’ll make money. And millions of people do just that.
You can’t make a financial model for FOMO. When everyone is getting rich and you’re not, you will want to buy in. When emotions overrule reason, is any price really too high?
Every asset is worth what someone is willing to pay.
If one person buys a terrible stock, they will lose their money.
If a million people buy a stock, some will make life changing money.
Finishing the Puzzle
Everyone can trade. Everyone has instant access to information. Everyone sees screenshots of gain porn. Every media platform is covering investments. Everyone has too much free time.
And then a story catches fire: GameStop has 142% short interest, and everyone is talking about it. If we all buy it and don’t sell, the shorts will be screwed. It could hit $1,000 a share. Finally, the little guy can win.
All of a sudden, everyone is talking about it. Rocket emojis, memes trolling short sellers, screenshots of gain porn. Everyone is getting rich.
Maybe you truly believe the narrative. Maybe you want to feel like a part of the movement. So you throw your money in.
Maybe someone else doesn’t believe in it at all, but he knows that a lot of people like you do. So he throws his money in too.
And maybe someone else thinks the entire thing is ridiculous, and he goes broke trying to short it.
Maybe a former US President, who was banned from Twitter and Facebook, decides to make a media entity. Maybe he wants to take it public through a SPAC. Maybe millions of his supporters would love nothing more than owning Trump’s stock, and maybe some other investors want to ride the MAGA wave to the top.
When all these maybes become realities, a SPAC taking a nonexistent media company public can run up 1700% in a day.
It doesn’t make any sense. But really, it makes perfect sense. Because when millions of people are throwing billions of dollars at the same assets for different reasons, who are you to say what the price should be?