AMC May Have Run Itself Out of Future Short Squeezes

AMC Entertainment (NYSE:AMC) continues to be a hit with the Reddit/WSB/Stocktwits crowd. AMC stock was up more than 27% despite showing no real signs of improvement in its business. It continues to issue new shares with deplorable growth prospects, which are likely to overwhelm even the short-sellers.

Neon sign of an AMC (AMC) theater
Source: rblfmr / Shutterstock.com

AMC runs one of the world’s largest theater chains with 950 theatres spread across 44 states in the USA and 14 foreign locations. Naturally, the novel coronavirus pandemic hit the business hard, which pushed the company to the brink of bankruptcy. The stock plummeted but was later reinvigorated during the Reddit-induced short squeeze, pushing its price to inexplicable levels.

In the past couple of months, AMC stock was up more than 100%. However, with its debt levels, it’s forced to issue more stock, resulting in more dilution and limiting another squeeze’s prospects.

Massive Debt

AMC has roughly $5.7 billion in long-term debt as per its latest quarter. These numbers are before accounting for its massive operating lease liabilities worth $5 billion. Additionally, the company posted a whopping $4.5 billion loss last year. Perhaps the company’s saving grace is that it has close to $1 billion cash in hand. However, the problem is that it is burning roughly $124 million per month in its fourth quarter.

Its massive debt load restricts its ability to attain capital for future projects. Also, the high interest in its debt suggests that more dilution is on the way. Paying more than $400 million in finance costs is a colossal burden, therefore, limiting its debt is a prime concern at this time.

AMC’s weighted average shares were 152.3 million in the fourth quarter last year. However, these shares have shot up to 450 million at this time. The company’s market capitalization is unfathomable, considering the lack of growth prospects and its substantial debt load. To put things in perspective, its market capitalization is around five times higher than what it was just before the pandemic.

Given the uncertainty of AMC’s attendance and the movie release schedule, it is virtually impossible to invest in the stock at current levels. On top of that, the persistent equity raises continue to limit the incentives for short-sellers. Therefore, I doubt whether the stock will be caught up in a significant short squeeze again.

Outlook for AMC Stock

The 2021 outlook for movie theaters is likely to improve significantly as the world gets a pandemic grip. Covid-19 hospitalizations in the U.S. were slowing down and it is expected that new coronavirus infections will drop considerably by mid-year. However, it is but natural to expect people to remain cautious for the foreseeable future.

Attendance numbers at theaters are still considerably low. AMC’s January attendance was down 92% and 90% in February. I expect AMC’s revenue to rebound significantly as the big-budget films release from the second quarter and beyond.

However, as I wrote in my previous articles covering AMC, the film industry is at a crossroads. Over-the-top platforms are taking off like never before, and the major entertainment houses have decided to tie-in their theatrical and OTT release on the same day. Also, some of these highly anticipated films are now exclusively releasing on OTT platforms. Therefore, it’s tough to assume whether AMC’s revenue could recover to pre-pandemic levels again.

Final Word

AMC Entertainment is in a mess, and it might take years to get out of it. Covid-19 has changed the entertainment business landscape, putting movie theater businesses under immense pressure to evolve.

AMC is incredibly leveraged at this point and continues to raise more equity to try and dig itself out of the hole it is in. However, the rampant issuance of shares will only limit its attractiveness to long-term and short-term investors. Therefore, avoid AMC stock for now.

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.


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