AMC Entertainment (NYSE:AMC) stock has been on a wild ride so far this year. Millions of investors on Reddit and other social media platforms joined forces to push AMC stock higher through short squeezes.
Investors are witnessing a virtual clash between retail traders and a number of established hedge funds of Wall Street, each side betting on an opposite outcome for the AMC share price.
There is strength in numbers, and retail traders seem to have the upper hand so far. Year to date, AMC stock is up 2,700%. The meme stock found itself skyrocketing in the early days of May, reaching $72.62 in early June before sliding down to its current price of nearly $60.
AMC management took advantage of this surge by selling shares to raise cash. The group has managed to bring $2 billion in fresh equity and debt capital in 2021.
At this point, it’s pure speculation as to what could be next for AMC stock. In today’s digital world, it’s becoming increasingly difficult for movie theater chains like AMC Entertainment to resist headwinds fueled by new streaming services.
If you are investor whose portfolio can handle the thrill of speculation, then you might want to consider having a small exposure to AMC shares. Otherwise, you should possibly put your capital into other robust companies that have solid growth prospects. Here is why.
How Recent Earnings Came
Kansas-headquartered AMC Entertainment is the largest movie theater operator stateside with over 1,00 theaters and 11,000 screens in approximately 15 countries. As lockdowns came into our lives, AMC stock price was initially crushed during the pandemic. A year ago, the shares were around $2.
Rival stocks like Cinemark (NYSE:CNK) and IMAX (NYSE:IMAX) also suffered. However, they fared better than AMC Entertainment. In fact, until recently the Street seemed ready to write off AMC stock on its way to bankruptcy.
In early May, the theater group released Q1 metrics. Management highlighted that as of March 31, “AMC was operating at 585 domestic theaters with limited seating capacities of between 15% and 60%, representing approximately 99% of domestic theaters.”
During the quarter, AMC’s revenues declined about 84% year-over-year to $148 million. Net loss of $567 million was in fact an improvement, compared to $2.18 billion in the prior-year quarter. However, AMC burned through $313 million in cash.
CEO Adam Aron commented, “Strengthening AMC’s liquidity position and balance sheet remains very high priorities, and we have been active across the board. Over the past five months, AMC has raised right around $2 billion in fresh equity and debt capital, including the conversion of $600 million of convertible notes into equity at a price of $13.51 per share.”
Since the release of the results, AMC stock has gone from around $10 to the current price of nearly $60. The market capitalization is close $29 billion. Its price-sales ratio of 24.2x points to a frothy valuation level. However, retail traders, fueled by the social media frenzy, seem to have made a handshake agreement to hold and not sell the shares.
AMC Entertainment Operates In a Stagnant Industry
Now that the pandemic seems to be waning, the bull argument is that movie theaters are opening up and that AMC can gain back a significant portion of sales as its theaters reopen. A surge in moviegoers could, in fact, generate positive cash flow even if the company remains unprofitable.
However, the pandemic has led to increasing uncertainty about the future of the movie theatre industry. According to IBISWorld, “The market size of the movie theaters industry in the U.S. has declined 19.1% per year on average between 2016 and 2021.”
Put another way, the movie business was already struggling to generate profits before the pandemic as movie crowds were staying away. Movie tickets sold in the U.S. have been falling consistently since the 2002 peak of close to 1.6 billion.
Moreover, streaming got more popular than ever during the pandemic as the main form of entertainment at home. So far, despite the opening of the economy, many people seem to keep their streaming subscriptions. This would understandably constitute a significant headwind for theater operators like AMC, whose recovery will likely be capped by the overall downturn in the movie industry.
The Bottom Line on AMC Stock
The $2 billion capital AMC has recently raised might offer some breathing space for recovery of operation in the coming months. However, AMC stock’s overvalued share price does not reflect an improvement in its underlying business. The company accumulated $5.5 billion in debt during the pandemic. Now, management has to sell new stock to pay it down.
After weeks of meme stock action, retail investors still remain well-organized to keep the AMC stock price soaring. Every institutional sale has met consequent short-squeeze moves. However, close to 23% of AMC shares are still sold short despite the meme stock buying frenzy.
Therefore, AMC stock is likely to stay highly volatile in the near future and would be suitable only for speculators whose portfolios can handle such high risk/high return investments. For the rest, Wall Street offers plenty of investing opportunities in stable and high-growth names.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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