What a wild ride investors in AMC Entertainment (NYSE:AMC) and AMC stock have been on of late. One of the original Reddit-fueled meme stocks of the past few months, AMC has whipsawed in dramatic fashion in recent weeks.
AMC stock began the year around the $2 per share level. In late February, shares of AMC breached the $20 level before falling down to earth. Today, this stock trades around $10 per share, still way down from its peak, but still a 5-bagger from the beginning of the year.
For investors considering this stock right now, I’d advise extreme caution. Here’s why I think AMC is a meme stock that should be avoided right now.
AMC Stock Is Extremely High Risk
Any stock with this kind of volatility certainly can provide for excellent short-term returns. However, investors piling into a speculative momentum trade such as this on the basis of other investors doing so is the definition of a bubble.
Indeed, buying a stock because all the cool kids are doing it isn’t a fundamental justification for owning any equity.
I would advise all conservative, fundamental, long-term investors to avoid this stock like the plague right now. Really, there’s no way I see investors winning in the short term. Yes, I think this stock will ultimately plummet, but predicting when is a fool’s game. Shorting this stock could be very dangerous. Indeed, the market can stay irrational far longer than many investors can stay solvent.
The fact that traditional fundamental analysis is being thrown out of the window today is worrying. Looking at AMC’s actual fundamentals, the story doesn’t make a lot of sense right now.
Market Cap Is Out of Line
At today’s share price, AMC is trading at a market capitalization of roughly $3.5 billion. In the broad context of the market, that’s not a surprising number.
However, looking at the historical market cap levels of AMC stock, we see that this number is out of line. From late-2018 to early 2020, AMC’s market cap remained consistently below $2 billion. Investors were pricing in secular decline in the cinema space. Attendance numbers were already on the decline. The pandemic just accelerated an existing headwind.
The spike we saw in February of this year pushed AMC’s market capitalization north of $6 billion. To put that in perspective, investors valued AMC stock in the $4 billion range during previous highs in 2015 and 2017. In other words, during the company’s brightest days, this stock traded at a 50% discount to February’s spike.
Put another way, at a $3.5 billion market cap, investors in AMC stock today are pretty much pricing in a return to peak 2015/2017 levels.
The Danger of Overly Simplistic Analysis
The r/wallstreetbets Reddit crowd seems to believe this stock is cheap relative to its historical levels. On a pure price-per-share basis, this is true. However, this simplistic analysis doesn’t take into consideration the massive amount of dilution that has come over the past year.
Since last summer, AMC’s share count more than quadrupled. Total shares outstanding are more than 460 million today, compared to only 109 million in August.
Why the dilution?
AMC’s management team intelligently took advantage of this irrational increase in its stock price to issue a ton of shares. These share issuances were broadly positive, as they’ve removed much of the near-term bankruptcy risk built into this stock. However, quadrupling any company’s share count in a short amount of time comes with considerable downside risk for existing investors.
This downside is less visible to the unsophisticated investor, but is real nonetheless. I would encourage investors to think hard about whether a return to the boom era of the movie theater is more likely than a continuation of a secular decline due primarily to the increasing prevalence and popularity of streaming services.
I think not.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
