One of the original “meme” stocks, AMC Entertainment (NYSE:AMC) has taken investors on a wild ride this year. Indeed, the parabolic spike in AMC stock through the end of January has been met with multiple sell-offs since. That said, shares of AMC are once again surging, as retail investors seem to be digging their heels in on this one.
Here are three things I think every investor needs to consider right now with AMC stock.
More Dilution Likely Coming for AMC Stock
A skyrocketing share price is great for everyone (except maybe short-sellers, which is the goal of retail investors, in this case).
Investors win. Lenders win. And, most importantly, the company wins.
This 2021 stock price surge has all but saved AMC from what seemed like sure demise. The company has been able to issue shares and raise capital to refinance debt, shore up its balance sheet, and handle the cash burn that is likely to continue for some time.
However, issuing shares comes at a cost to investors. Dilution is one of those dangerous invisible foes that takes money out of your pocket when you’re not looking. It’s like broader inflation in that regard. Indeed, dilution could be defined as equity inflation. The more shares that are created by a company, the less one’s existing stake is worth. That is, unless you’re accumulating shares at the rate the company is creating them.
Given the recent surge in AMC’s stock price, I expect additional equity issuances on the horizon. As mentioned, the company’s got a ton of debt, and needs to address it somehow. Unless retail buying in this stock continues at this frantic pace in perpetuity, there’s likely to be a slowdown in this stock’s performance at some point.
Valuation Out of Line with Historical Levels
AMC’s valuation right now is a head-scratcher to me. On a historical basis, AMC is near its all-time highs with respect to its market capitalization.
One might ask: how is that the case? After all, the company’s share price is way down from where it was a few years back.
The reason: dilution. The company’s share count has more than quadrupled over its count last summer.
At the time of writing, AMC’s market cap sits at $7.2 billion. As I pointed out previously, “To put that in perspective, investors valued AMC stock in the $4 billion range during previous highs in 2015 and 2017.”
Right now, AMC is up over 450% in the last year. Remember, when theaters were full and we were crammed like sardines in a dark theatre together? Considering the likelihood of social-distancing and mask-wearing measures likely to be imposed for quite some time, this valuation doesn’t jive with reality.
Don’t Forget About Deferred Costs
The pandemic was so 2020.
We’re all looking toward the end of the pandemic, focusing on vaccines and economic reopening stories rather than those of yesteryear. However, investors may recall that way back last year, rent deferrals were a thing. Companies like AMC now carry massive deferred rent obligations that will come due at some point.
According to the company’s most recent earnings call: “At the end of the fourth quarter, we had deferred rent of approximately $450 million with repayment terms being, on average, 27 months.”
Now, $450 million might not sound like a big number. However, when we look at net income for AMC during the 2016-2019 period, earnings were only positive two years, with net losses for the other two years that greatly dwarfed income. And those were the good ol’ days, before the company racked up a massive amount of debt (with an annual interest expense approaching $100 million per year as well I didn’t mention).
Investors are now pricing in much more than a “return to normal.” At this valuation, investors are implying theaters will be overcapacity, patrons will pay higher ticket prices, and the company’s debt will cease to be a problem.
I just don’t see it.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
