Having struggled extensively throughout 2020, AMC Entertainment (NYSE:AMC) is finally seeing some light this year. It recently announced that 99% of its theaters will reopen on March 26 at reduced capacity. It can now effectively resume its business, but that doesn’t mean it’s out of trouble. The company may have survived the pandemic but the future looks worrying. Due to reduced operating capacity and consumer safety concerns, the company is not operating anywhere near its full capacity and is far from profitability. AMC stock does not look attractive at this stage.
AMC managed to avoid filing for bankruptcy only three months ago, but the financial health of the company does not look good. It has issued more than $400 million in debt capital and is burning cash to survive.
Despite the recent rise in AMC stock, I do not think it will be able to survive the storm in the long term. The pandemic may have started AMC’s dive, but it’s not the only problem. Let’s dig deeper into the investment case for AMC stock.
AMC Has Stiff Competition
All of us have gotten comfortable at home over the past year. Theaters are ready to welcome viewers, but are viewers eager to return? Are we ready to sit inside a theater without knowing the vaccination status of the ones sitting along with us? Not many consumers are willing to walk into theaters anytime soon. Unless there is a complete end to the pandemic, AMC cannot be very certain about operating at full capacity.
Further, the same entertainment options are available at home at a lower price. The competition from streaming services is here to stay, even after the pandemic ends. With several major theatrical releases happening entirely through streaming, many consumers have shown they’re happy to enjoy the latest release from the comfort of their homes.
Agreed, it does not match up to the experience of enjoying the latest action movie in the theatres, but what about the health risks?
Considering the number of options offered by streaming platforms and the choice of watching the latest movie at your preferred time and date, would you want to walk inside a theater? The big screen and high scale have become unnecessary and studios are adapting to it. WarnerMedia announced that it will release all of its films on HBO Max on the day they hit theatres. Further, Walt Disney (NYSE:DIS) also announced that it will do the same on the Disney+ streaming platform for some of its movies.
Theater chains held exclusivity in the past and their structure of functioning is highly dependent on studios. With constant competition from streaming services, and the health risks of sitting in an indoor crowded theater, a decline in consumers is likely to continue throughout 2021. It will have a long-term devastating impact on AMC stock.
Making matters worse, the company is heavily in debt and is already burning $140 million per month. If it continues with the same in the coming quarters, it may have to raise capital again. Lastly, nobody knows when AMC Entertainment will be profitable. For now, we can only speculate.
The Bottom Line on AMC stock
No matter what AMC Entertainment used to be in the past, it will never go back to it. There is so much going wrong for the company that it will take at least three to four years to reduce losses and gain ground in the industry. Besides the low traffic, the company will also have to incur costs to maintain safety and hygiene inside the theatres. It already has a piling debt and huge interest costs to pay throughout the year, which will further put pressure on the cash flow.
The company is already struggling to survive and generate profits and the road ahead is not easy. Investors should not keep high hopes for AMC stock. The current rise is temporary and it looks like AMC will struggle to fill seats.
Smart investors should not buy in the recent hype surrounding the stock. Considering the current state of the company and a market cap of $5 billion, the shares look overpriced at $10. They are best kept out of your portfolio.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Vandita Jadeja is a CPA and a freelance financial copywriter who loves to read and write about stocks. She believes in buying and holding for long term gains. Her knowledge of words and numbers helps her write clear stock analysis.