Shares of movie-theater operator AMC Entertainment (NYSE: AMC) are part of the recent rise in Reddit-inspired trades. After jumping another 30% at Monday’s open, shares are trading 20% higher as of 9:35 a.m. EST.
AMC Entertainment Holdings Inc. stock has “decoupled” from fundamentals and should be sold, according to MKM Partners analyst Eric Handler, who said the stock could fall to $1 this year.
The stock AMC, 6.03% rose $1.03, or 7.8%, in morning trading Monday, but pared earlier intraday gains of as much as 30.1%, while trading volume ballooned to 245.6 million shares.
Although the stock also soared $4.63, or 53.7%, on Friday, it has now recovered just 50% of the $11.27, or 56.6% plunge it suffered last Thursday after the Robinhood trading platform restricted trading in some stocks.
Top 3 Reason for buying AMC Stock
1. AMC looks stunningly overvalued
According to The Wall Street Journal, retail investors are coordinating on social media to drive up the price of heavily shorted stocks. The trend started with GameStop and spread to other easy targets like AMC, which had a short interest of 24% as of Jan. 27. The company now boasts a valuation that is wildly out of line with its fundamentals.
With a closing price of $13.23 a share on Jan. 29, AMC’s market cap is $4.5 billion. And with revenue of $2.26 billion over the trailing 12 months (as of the third-quarter report), the stock has a price-to-sales (P/S) ratio of roughly two. That multiple is not bad compared to the S&P 500‘s average of 2.72. But AMC’s P/S ratio only tells half of the story without factoring in profit margins and top-line growth — both of which the company lacks.
Third-quarter revenue plummeted 91% to $120 million because of a collapse in movie ticket sales amid the coronavirus pandemic. The company has lost roughly $3.6 billion so far this year. And management expressed significant doubt about AMC’s ability to continue as a going concern because of its cash-burning operations.
2. Management seems too optimistic
But despite the grim wording in AMC’s third-quarter SEC filing, CEO Adam Aron sounds more optimistic in more recent public statements. He is confident that AMC can keep its doors open in 2021 because it has raised $917 million in new equity and debt capital since December. The surge in AMC stock may have bought the company even more time.
In January, Silver Lake Group (a major AMC investor) converted $600 million of its convertible notes to stock at $13.51 per share. This move could dilute investors, but it will ease AMC’s debt burden, which stands at $5.8 billion as of the third quarter. The company also faces operating lease liabilities (deferred rent for its locations) totaling $4.9 billion.
Right now, AMC wants to chug along until enough of the general public gets vaccinated to end the coronavirus pandemic. So far, 22 million Americans have received at least one shot, and National Institute of Allergy and Infectious Diseases Director Dr. Anthony Fauci believes things could return to normal by the end of 2021. But herd immunity might not be the panacea for AMC’s problems.
3. Studios are moving to on-demand streaming
Even if AMC outlives the pandemic, its stock isn’t necessarily a good investment for equity holders, who will face substantial dilution and a high debt load. These factors will be a long-term drag on earnings per share (EPS) and cash flow because of a higher number of shares outstanding, interest expense, and debt amortization.
More importantly, the movie theater business may never return to its former glory. The industry was already in decline, with box office sales falling at a compound annual growth rate (CAGR) of negative 1.4% from 2002 to 2019. And the coronavirus pandemic may have accelerated this trend by encouraging studios to build up their streaming platforms.
In October, Walt Disney announced plans to reorganize its media division around streaming instead of theatrical releases. Universal Studios pushed the envelope in July by signing a deal with AMC allowing it to release movies on demand within just three weeks of their theatrical debut (down from the previous 75–90 days).