If you were to look at the price action of AMC Entertainment (NYSE:AMC) shares throughout most of January, you might be led to believe that everything is sunny and AMC stock is destined for long-term gains.
Anything is possible in the markets, but informed investors must be wary of short-term hype. We have to focus on big-picture thinking and consider whether AMC’s price movements reflect the reality of the situation.
If anything should propel the price of AMC stock, it ought to be strong revenues for the company’s movie theaters. Sometimes the trading community can lose sight of this, unfortunately.
Some folks like to buy the dips, while others prefer to buy the rips. But when it comes to AMC stock, I wouldn’t want you to buy it now and have your account get ripped apart.
AMC Stock at a Glance
What’s really troubling about AMC stock is that its long-term decline started long before the onset of the novel coronavirus.
The stock topped out not just once, but twice at the $35 level. This first happened in 2015, and then again in 2016. With a few sucker’s rallies along the way, it was all downhill after that.
Therefore, it’s safe to conclude that Covid-19 isn’t the only reason for AMC stock’s fall. It certainly is a contributing factor, but the distribution of a vaccine probably won’t solve all of AMC’s problems.
By Jan. 15 of this year, AMC stock had descended all the way down to $2.33. But then, the share price quickly jumped above $3. Naturally, this might give the bulls a sense of confidence.
Yet, we shouldn’t let confidence morph into overconfidence. There’s more to the story than the recent price action of AMC stock. Specifically, we should closely examine why the stock price went up so quickly.
Debt Sale
Selling debt notes can be a double-edged sword for a company. Sure, it’s a quick and relatively easy way to bring in some capital. And in the case of AMC Entertainment, there’s no doubt that the company could use some cash.
On the other hand, there’s a less appealing side to issuing debt notes. Investors shouldn’t consider the raised capital as a gift to the company. Like any other loan, it must be paid back at some point.
Moreover, the lender isn’t typically getting involved out of pure generosity. In AMC Entertainment’s case, there’s interest to be paid along with the repayment of the principal amount, and it’s not cheap by any means.
As we’ll see, raising capital through debt issuance might buy AMC Entertainment some time. This, however, doesn’t mean that it will fix all of the theater chain’s problems.
High Price Tag
In 2020, AMC Entertainment admitted that it would run out of cash soon if changes weren’t made. Moreover, the company conceded that it might have to consider bankruptcy.
In an attempt to remedy this dire situation, AMC Entertainment issued $100 million worth of secured debt to financier Mudrick Capital.
The interest rate on that debt will be an eye-popping 15%. Anyone who has ever paid interest on a loan can probably appreciate how quickly an interest rate of that magnitude can add up.
Now, let’s do the math here. AMC Entertainment has stated that it expects its existing cash reserves to be depleted in January 2021.
Furthermore, the company projected that it would need at least $750 million of additional liquidity in order to fund its cash requirements and remain viable through 2021.
In other words, AMC Entertainment is still in a deep financial hole, even with the $100 million capital loan.
The Takeaway
It’s fine to have confidence in a stock if there’s a valid reason. However, let’s not confuse misplaced hope with well-founded confidence.
When it comes to AMC stock, the financial hole is too deep and issuing debt shouldn’t offer much hope at this point.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
