AMC stock is unlikely to deliver growth over the long-term and here’s why.
AMC Entertainment (AMC) has had a rollercoaster year so far. The reddit community turned the investment world on its head by joining forces to up-bid AMC stock. The community actually managed to boost the share price by nearly 3,000% at one stage in what was billed by many media bods as a battle between retail traders and several prominent hedge funds on Wall Street.
But the last few weeks have shown that momentum has slowed and is possibly in the early stages of fading. The shares that were the subject of the squeeze are currently trading at around $35. In early June though, they hit a record high of $72.62, and despite the apparent tailing off of some of the early investment, AMC stock is still up over 1,500% fin the year-to-date.
Not willing to sit around and wait, AMC management got straight to work while the short squeeze was driving the stock price ever higher. By selling shares to generate cash, AMC was able to raise $1.2 billion in cash via equity offerings in the second quarter alone. That being the case though, AMC still remains some way short of safety. AMC’s liquidity was boosted to around $2 billion, but still has yet to finance a $5.5 billion long-term debt.
The stagnation of the movie business during the past decade – especially during the pandemic – and the rise of streaming services are restraining the upside potential for AMC stock. In fact, it’s difficult to see how the likes of AMC can really recover over the long-term. The sector has been hit hard by the pandemic, and we still find the stock’s long-term potential severely limited – regardless of the fortuitous help given to it by r/WallStreetBets. In fact, this level of intense speculation could even hurt retail investors who get caught in the sensationalism. Long-term investors can find better investments elsewhere.
AMC’s Recent Stock Earnings
AMC is the biggest movie theater chain in the US, with over 11,000 screens in approximately 15 countries. AMC stock price initially plunged to around $2 at the height of the pandemic. It’s certainly true that AMC’s rivals were hit as well, but the likes of IMAX (IMAX) and Cinemark (CNK) were able to arrest the slide somewhat better than AMC.
AMC’s first quarter revenues plunged 84% year-on-year to $148 million. The net loss of $567 million was still better than the $2.18 billion loss in the prior year though. But in other aspects, AMC stock also looks severely overvalued for such a struggling company. Current market capitalization for the company is around $19.6 billion, with a current price-sales ratio of nearly 15x.
AMC was saved by reddit investors this year and though on the one hand, this represents a sizable win for the online community-based investment group, the company is still some way from being in the black. Most analysts aren’t expecting good news to be released in the second quarter earnings report set to be released next month.
Ticket Sales Remain Sluggish
Even before the pandemic, the movie industry was struggling to keep up with its streaming competitors. Box office totals have grown, but ticket sales have been steadily declining outside of the world of box office premiers for some time. The pandemic has only hastened the seemingly inevitable decline in local and independent movie theaters. Unlike some other industries though, movie screens are showing little sign of a rebound, with ticket sales down 80% over the last year. Most analysts aren’t expecting sales to recover any time soon.
It’s obvious that the sheer scale of the movie theaters’ losses are due in part to the likes of Netflix (NFLX), Disney (DIS) and AT&T’s (T) backed HBO Max. To make things worse, companies like Warner Media and Disney will now be simultaneously releasing their movies in theaters and on their streaming platforms. There are hardly any long-term tailwinds for the company.
The Bottom Line
Media outlet Bloomberg reported last year that AMC Entertainment was facing the prospect of filing for Chapter 11 protection by the end of 2020. Regardless of the help given by the reddit community, the unsecured bond prices are currently suggesting there is a very real prospect of a default. To even think about remaining solvent, AMC will have to somehow find a way to get audiences back into cinemas, and with the current environment, this is unlikely.
The stagnant movie theater industry is unlikely to compete with streaming services, and we don’t expect AMC to launch a sustained recovery or boost its top line. The underlying metrics simply don’t support the idea of a recovery, so we’re suggesting investors look elsewhere this time.
