Watching movies on the big screen is now a thing of the past and AMC Entertainment Holdings (NYSE:AMC), the largest theater chain in the world, is feeling the heat. The coronavirus pandemic has decimated the theater experience as digital streaming platforms find a new wave of success. AMC stock is now forced to raise nearly $700 million from investors in order to stay afloat.
Like many businesses that have suffered as a consequence of the pandemic, the company finds itself at a crossroads. Raise additional liquidity to get through 2021 or file for bankruptcy.
Given its options, there is no best-case scenario for the theater chain. This puts AMC stock in the no-buy zone.
Streaming Wars Decimate AMC Stock
Since the start of the pandemic in March, digital streaming platforms are now playing a more prominent role in our lives. The stay-at-home economy has made companies like Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) a major source of entertainment for many.
This is has resulted in some epic gains for companies in the industry over the course of 2020. But there are winners and losers in every situation. In this case, it’s movie theaters.
AMC Entertainment is among the worst-hit businesses this year as the pandemic only magnified the challenges theaters faced. For one, the stay-at-home orders and lockdowns prevented people from going to movies this year. But a more probable cause for its long-term demise can be attributed to the rise of digital streaming. These underlying issues have led AMC stock to decline by 50% with more downside ahead.
Although AMC reopened more than 70% of its theaters since the forced closures, movie-going rates are only 10 to 20% of its 2019 numbers. Many people are afraid of catching Covid-19 in closed spaces like theaters and find greater solace in watching movies at home. As a result, AMC burned through substantial levels of cash this year. The company finds itself facing a great deal of urgency to raise some quick cash.
Companies that have gained from the demise of movie theaters are now looking to cement their success for the long-term. Disney recently announced that it will restructure its entertainment division to focus on its streaming platform, Disney+. The company hopes to reach an audience of 230 to 260 million people by 2024.
The pandemic will create permanent shifts in the way we live our lives and the death of the big screen experience could be one of them.
AMC Needs To Raise Cash Quickly
With closures that lasted for months on end, AMC’s core business has taken some major hits. The rollout of the vaccine will kick-start the return to a “new normal” but it could take years before companies recoup their losses. The nation’s largest theater chain is among them as it finds a new sense of urgency to take action. Earlier this month AMC announced that it will need to raise $750 million or declare bankruptcy.
At this very moment, the return of moviegoers seems like an unlikely situation as Covid-19 cases spike across the nation. This means that shareholder cash is the only way AMC can stay afloat until life returns to normal. The company plans to sell 200 million shares at $3.58 apiece according to a recent report. But despite a potential lifeline from shareholders, lenders are still urging AMC to file for bankruptcy. A Chapter 11 filing will give the company $1 billion in cash and creditors full control.
There are two major reasons AMC will not survive in 2021. One, the timeline of the vaccine rollout is very uncertain and the recovery of movie theaters is wholly dependent on this. Second, even when things do go back to normal, there is a good chance that streaming will become the primary source of entertainment for good. AT&T (NYSE:T) Warner Bros. recently announced that its films in 2021 will release on HBO Max and movie theaters at the same time. AMC stock dipped by 17% following the news.
The Bottom Line
Getting customers through movie theater doors is an arduous task right now. Adding to this is the high level of uncertainty that exists around its eventual return. We can even take an optimistic view and believe that AMC will survive the pandemic. However, the company’s debt-ridden balance sheet will be a major drag on its numbers for years. This makes AMC stock a high-risk buy for long-term investors.
There is no light at the end of the tunnel for AMC and it would be wise to stay away from this stock until life returns to the big screens once again.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.
