Late last year, AMC Entertainment (NYSE:AMC) warned investors that bankruptcy could be a possibility because of the devastating impact of the Covid-19 pandemic. But things would change in a big way — and for the better. AMC would manage to raise $1.2 billion in debt and equity financing. And yes, there was the Reddit frenzy, which targeted companies with high levels of short position. The result was that AMC stock skyrocketed. Since early this year, the shares went from under $2 to a high of $20.
But lately, the enthusiasm has greatly diminished. Note that AMC stock is back to $5.60, and the market capitalization is $1.9 billion. This boom-bust pattern has been the same with other Reddit stocks like GameStop (NYSE:GME), Bed Bath & Beyond (NASDAQ:BBBY) and BlackBerry (NYSE:BB).
Then what’s next for AMC? Could there still be another run? Or should investors just stay away?
Let’s take a look.
The Restructuring
During the latest earnings report, AMC noted that domestic attendance was off a grueling 97% compared to the same period a year ago and that international attendance was down 82.5%.
In light of this, it should be no surprise that the financials for the company have been downright awful. In the third quarter, revenues came to $119.5 million, down from $1.3 billion on a year-over-year basis. Furthermore, the net loss was $905.8 million.
But AMC has taken swift actions to cut back on costs. Part of this has been to take capital expenditures to minimum maintenance levels. Then there has been the cutting back on non-essential expenses as well as the renegotiation of leases.
According to AMC CFO Sean Goodman on the earnings call: “[I]t’s worth noting that we are using these unprecedented times as an opportunity to intensely examine every single category of our spending and all plausible opportunities to enhance our efficiency and improve our profitability for the long term. While the closure of our theaters is temporary, the learnings and the actions that we are taking will have an enduring long-term benefit for AMC.”
The Fundamentals
The liquidity for this year is based on a major pick-up in attendance at AMC’s theaters. And actually, this seems like a good bet. While the rollout of vaccines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) got off to a rocky start, the situation has since become much more effective. In the meantime, there has been major improvements in Covid-19 infections, hospitalizations and death rates.
In fact, by the summer, Covid-19 restrictions may be dramatically reduced. If so, there will likely be lots of pent-up demand for watching movies at theaters, and AMC may get to cash flow positive since the cost structure has been minimized.
But despite all this, there will still remain some nagging issues. Consider a recent analysis from MKM Partners’ Eric Handler. He cut his rating from neutral to sell and put a $1 price target on AMC stock. This assumes 82% downside from current levels! He believes that the debt load will weigh on the performance of the company.
Next, there is about $480 million in deferred rents. At some point, these will need to be paid back.
Keep in mind that Handler is not the only one with a pessimistic view on AMC stock. For example, the average price target on AMC for Wall Street analysts is $2.51.
Bottom Line on AMC Stock
While the aggressive financings have staved off a liquidity crisis, they have also resulted in a flood of new AMC shares on the market. Private equity backers, like Silver Lake, have converted their debt to equity — and have sold off their positions.
As a result, the shares outstanding are 441 million, up about 4X since the end of the third quarter! In other words, there has been significant dilution — which will make it even tougher to sustain the current valuation on AMC. In other words, this investment looks particularly risky right now.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.
