In my previous article on AMC (NYSE:AMC) stock, I said that the only way for the company to survive this year and avoid bankruptcy is to raise cash quickly. In a reversal of fortunes this week, AMC’s CEO announced that it had raised enough cash to officially put bankruptcy off the table. Shares of the company rallied by 36% following the news.
While this is great news for the company, I still stand by my initial statement on the long-term prospects of the movie-theatre industry. AMC continues to face challenges after the pandemic decimated its core business. Looking at the big picture, the company faces a long road to recovery despite the recent surge.
Here’s my take on why AMC stock is not completely out of the woods despite a 600% rally in its share price this year.
AMC Stock Spikes on News of Additional Funding
After a tough year of long-term closures and limited capacity seating, AMC found itself on the brink of collapse. The only way for the company to avoid going under was to raise shareholder cash to fund its operations.
In what can be described as a ray of hope, AMC managed to do just this and put imminent bankruptcy off the table. As expected, investors rejoiced at the news and pushed its stock higher.
Given the challenges the movie theatre business faced this year, the additional funding is great news for the company. To put things into perspective, AMC burned through large amounts of cash during the pandemic and was expected to run out this month. There was a dire need for greater liquidity. AMC was able to pull a win in the end and successfully raised $917 million in the last six weeks. This is in addition to the $1 billion raised between April and November of 2020.
Ultimately, avoiding bankruptcy doesn’t necessarily mean that the company is in the clear. Movie theatre chains like AMC have a long road to recovery and will take at least a couple of years to reach their pre-pandemic levels. In the grander scheme of things, the additional funding has bought AMC more time but it still has a lot of work to do.
A Fairytale Ending For AMC Is Unlikely
GameStop’s trading frenzy spearheaded by an army of risk savvy traders on Reddit was all over the news this week. Following its explosive rally, Redditors soon targeted other companies that Wall Street is betting against, like AMC. Shares of the theatre chain soared 450% this week with its trading volume growing to 1 billion shares.
While this spike pushed AMC’s price much higher, it’s worth considering the fundamentals of the stock and the path forward. As mass vaccination continues, people will avoid enclosed spaces like movie theatres for the foreseeable future. Even when theatre seats do fill up, a full recovery from the pandemic will take a few years.
And that’s just scratching the surface on AMC’s problems. Theatre chains face a major threat from streaming platforms that took over the entertainment sphere last year. Major production companies have announced that the movies slated for release this year will go straight to streaming. As for its lease payments, which are a huge burden on AMC’s financials, the company will need to negotiate rent relief terms with its landlords.
A fairytale ending is not in the cards for AMC stock in the near future.
The Bottom Line
So should you get swept away by AMC’s trading frenzy this week? Here’s what Eric Schiffer of Patriarch Organization and Reputation Management Consultants believes.
“This is certainly not rational, these are the markets of stone-cold crazy times,” says Schiffer. “AMC is grossly overvalued because of a marauding of shorts that’s powered by the internet and these aggressive traders acting in packs,” he says.
I think there is truth to this sentiment. AMC stock may be up but it is the result of aggressive trading in the markets. Investors need to remain cautious and look at this stock from an industry perspective. Unless a majority of the population is inoculated, we are unlikely to see movie theatre seats fill up to capacity. Add to this the increased competition these establishments face from new-age streaming platforms.
The $2 billion in funding definitely puts AMC stock in a better position, but I would just wait and watch how things playout for the movie theatre chain in the coming months.
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.
