AMC Entertainment Holdings (NYSE:AMC) is another stock that was caught in the Reddit-induced short squeeze this past month. The multiplex operator had been reeling for the better part of 2020 due to the Covid-19 restrictions. The short squeeze lifted AMC stock to as high as $20 before plummeting 73% since peaking on Jan. 27.
The company has issued new shares and debt to pump its limping cash resources. However, with the film industry at a crossroads, it’s tough to imagine a pre-pandemic scenario for the company.
AMC stock’s price spike was nothing short of incredible. A run-up of $3 to $5 was understandable, but no one expected it to reach $20. The current mean targets for the stock are roughly 62% lower than its current price. Additionally, its lowest estimates price it at just a dollar and change.
With the Securities and Exchange Commission (SEC) stepping in to investigate the short squeeze, it appears that specific events might get marginalized going forward. The reality is that AMC stock is in dire straits, and the recent run-up does nothing for long-term investors.
Avoiding Bankruptcy
In October, AMC talked about how its existing cash resources could run out by the end of the year. The lack of demand and the reduced movie slate is mostly to blame for its cash crisis. However, since then, the company has used a combination of equity and debt offerings to secure more than $1 billion in cash between April and November of 2020. Moreover, in the past six weeks, the company raised an additional $917 million capital infusion. As a result, bankruptcy appears to off the table for another nine to 12 months.
Here’s a list of things AMC has done to stay afloat in the past few months:
- It issued $500 million of 10.5% first-lien notes, which are due in 2025.
- It reduced over $550 million in debt and $120 million in cash interest expenses through a debt exchange offer. Moreover, it also drew down $325 million of its revolving credit facilities.
- It completed two at-the-market (ATM) equity offerings in September, raising $97.7 million. Additionally, in January, it completed another ATM offering raising $304.8 million.
- The additional $917 million infusion was raised through another stock offering worth $506 million and a $411 million line of credit.
AMC has staved off bankruptcy for now, but it needs to generate substantial revenues to avoid burning through its cash reserves in the long run. At the moment, though, it appears that demand won’t be returning to 2019 levels until 2024.
Has the Coronavirus Killed Movie Theaters?
The global pandemic forced theatres to remain closed for the better part of 2020, but now with most theaters open, demand isn’t picking up. As of last month, AMC was operating at roughly 45% capacity, but attendance was down 97%. Such a development beckons the question about whether theaters are running an outdated business model.
Over-the-top (OTT) platforms have done incredibly well during the pandemic, substantially increasing their user base. Several movie studios are now looking to cut out the middleman and push releases directly to consumers. Television networks such as HBO have announced a whole laundry list of films to release simultaneously in theaters and on their streaming service. Therefore, movie theaters need to rethink their strategies to compete with them in the long term.
A Forbes article last year talked about how monthly theater subscription services could potentially lift the industry out of the rut it is in. This could include rereleases, monthly runs of classic films, concessions and other elements to entice the customer. However, if theater operators lack proactivity, then things are likely to spiral out of control for good.
Final Word on AMC Stock
AMC has done well stalling bankruptcy concerns for now. However, the reality is that without a significant bump in revenues, it will burn through its cash reserves quickly. Returning to pre-pandemic levels will be tough, considering the apparent step-change in the film industry.
Film operators such as AMC need to consider moving to a subscription-based model to generate sustained revenues in the future. At this point, AMC stock is a highly unattractive investment option.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
