The biggest movie theatre chain AMC Entertainment (NYSE:AMC) has suffered the most due to the pandemic. Despite raising funds and securing the company from declaring bankruptcy, it has not been able to see light at the end of the tunnel. Due to the lockdown and movement restrictions, most of its locations had to restrict capacity or shut down. This has had a huge impact on AMC stock.
AMC has the largest share of the US theatre industry. AMC stock hit a bottom of $2.10 and has recovered over 75% since the lows. Due to the short squeezing activity, the stock hit the level of $20 and is down again. It is currently exchanging hands at $10. I believe the stock will see a major downside in the coming months.
The Q4 results have been disappointing with losses and a huge debt burden. It will certainly take a lot of time for AMC to return to pre-covid revenue and growth levels. The company may survive the pandemic momentarily but the long-term outlook does not look promising. With that in mind, let’s take a look at my investment case for AMC stock.
Disappointing Q4 results and growing debt
For Q4 results, the company reported a loss of $1 billion in the holiday season. The sales stood at $162.5 million and were down 88% from the same quarter the previous year. The fourth- quarter loss was $946.1 million which stood at $14 million in the previous year. These numbers clearly show that AMC has not been able to handle the pandemic well.
With a loss of $3.15 a share, the Q4 sales reached $1.24 billion, a steep decline from $5.55 billion in 2019. Despite the theatres at most locations being closed, the expenses have remained the same. There is no decline in operating expenses from the previous year and the cost of interest on corporate borrowings have gone up in 2020.
AMC has a growing mountain of debt. It is dealing with a debt of $6 million and has raised more cash by issuing shares. The company has been able to handle the bankruptcy fear by issuing shares. It had a cash infusion of $917 million and issued additional 164.7 million shares. This debt has an interest rate of 15%. Now, even if the company generates earnings in the coming months, there will be a strain on it due to the interest liability.
The dynamics of the industry have changed in the past year. People prefer to stay at home and enjoy their favorite movies through streaming platforms. This will come as a huge blow for AMC. Studios will prefer to release the movies simultaneously on a streaming platform and a theatre. The company is heavily dependent on creators for new films and exclusive rights. If the demand for streaming platforms continues to rise, AMC’s business model could be at risk. It will have a downside effect on AMC stock.
The Bottom Line on AMC stock
Theatres have opened in New York City but they did not attract many viewers. With the rollout of vaccines and the gradual opening of public places, it is expected that some top releases will draw the audience. But this may take time. We are not completely safe yet and people will be unwilling to go into the theatres without knowing the vaccine status of the others in the theatre.
AMC has a rough ride ahead and the debt burden will slow its growth. Even if the theatres at other locations reopen, it will be hard to reach the pre-covid growth level. AMC stock looks overvalued at the current levels of revenue and debt. I think it is best to stay away from the stock for now. It will dip further in the coming months.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.
