The central idea in the classic Mel Brooks comedy “The Producers” is that unscrupulous Broadway impresarios could succeed fabulously by creating a play so uniquely awful that it would close on its first day. Their idea was to oversubscribe shares to investors, to the point where hundreds of percentages of ownership could be claimed. But if the show failed spectacularly, there would be no proceeds to fight over, all the investors would accept that their shares were worthless, and no one would know that they had been conned. The producers could pocket the excess money. The only way they could fail would be by producing a hit.
To guarantee that failure the fictitious Producers imagined the (still hilarious) musical “Springtime for Hitler.” In an eerie example of life imitating art, the new producers on Wall Street have given us Gamestop and AMC Entertainment. These two companies (among others) have such irrefutably dismal prospects that they have produced windfalls for their boosters. Is this supposed to be a comedy? I’m not sure.
The rationale behind the meteoric rise of Gamestop, a chain of videogame rental stores, and AMC, one of the nation’s largest cinema operators, is too unlikely to be believed. In just one month both stocks had risen by more than 600%. Typically, such dramatic movements only happen when previously unloved companies release dramatic earnings surprises on the upside, causing analysts to completely reverse their past pessimism.
Did that happen here? On the contrary, the prospects of both stocks are as bleak as ever. Analysts agree on that. The video game rental industry is being doomed by the same forces that gutted Blockbuster Video 15 years ago. The need for brick-and-mortar stores that rent discs no longer exists. Gamestop has no plan to survive, and they are left with lots of real estate leases that nobody needs. The same holds true, to a lesser extent, for AMC. Covid has completely decimated movie theaters in the present and has likely hastened their decline in the future. While the movie-going experience may re-emerge after the pandemic in a boutique version of its current self, no one believes that its glory days will return now that consumers are so accustomed to streaming blockbusters on their home theaters.
Instead, both companies have been rewarded for their own certain failures. It’s true. I’m not making this up.