AMC: Why This Meme Stock Is Just Too Risky

Shares of AMC Entertainment Holdings (NYSE:AMC) have been on a tear lately for a mix of reasons. It has been a meme stock, it has been a coronavirus reopening bet, and it has been severely negatively impacted by the outbreak of COVID-19 globally. Is AMC stock a buy now? And is it a value stock or a growth stock?

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

The S&P 500 Global has issued a special report on meme stock mania featuring the extreme price volatility due to short squeeze, dangers to risk management, regulatory scrutiny and a potential market bubble.

Let’s demystify the recent surge of the AMC stock price.

AMC Stock and Meme Stock Mania

Back in March 2020, AMC stock was trading at about $3 per share. Then in late January 2021, the stock reached a 52-week high of $20.36 and has been subject to a sell-off trading near $13 per share. The big question is why this surge of its stock price?

There was no material news, which is the key driver of stock movements. There was only headline news about a specific Reddit forum that supported some stocks and caused a massive short squeeze. Was it justified?

The answer is no. It was pure speculation. And many investors were lured by the FOMO effect and pushed AMC stock higher. In the pursuit of making big profits too fast, there was speculation that nourished the gigantic AMC stock price move in the bubble territory. Because AMC has a deep structural financial problem. Or to be more correct, a mix of financial worries that make it too risky.

Recipe for a Risky Financial Situation

The fourth-quarter and full-year 2020 financial results have been revealing the magnitude of poor financial performance due to the pandemic. I will focus on a recent report by Yahoo Finance: “Dalian Wanda Group Co., the conglomerate founded by Chinese billionaire Wang Jianlin, has given up its majority control over AMC Entertainment Holdings Inc. after the world’s largest cinema chain reported a record loss of $4.6 billion for 2020 amid repeated warnings of insolvency.”

AMC Chief Executive Officer Adam Aron stated, “With no controlling shareholder in place now, AMC will be governed, just as most other publicly traded companies, with a wide array of shareholders.”

This, in theory, seems a good idea. But to me, having the largest shareholder of the company reducing its stake significantly means a disapproval or worries about the future of the company, rather than positive news. It means that the largest shareholder estimates that perhaps other more attractive investments exist elsewhere. And judging by the latest economic performance of AMC, chances are that he has performed due diligence and was notpleased by the financial performance.

  • For the 2020 full-year, revenue dropped 77.3% to $1.24 billion from $5.47 billion in 2019.
  • A net loss of $4.58 billion occurred compared to a net loss of $149.1 million in 2019.
  • A negative free cash flow of $1.3 billion compared to a positive free cash flow of $60.9 million in 2019.

The results were not good at all. But what is worrying is that the company decided to make a significant capital change by raising debt and issuing stock. It converted debt to equity. And that created stock dilution for shareholders, which is negative news.

Weak Performance

Even before the pandemic, the financial performance was not great. According to data from MorningStar, the net margin for the years 2015 to 2019 peaked at 3.52% in 2015. And interestingly, in 2015, the free cash flow also peaked at $134 million. Free cash flow was negative for 2017 and 2018. And in 2019, when the pandemic was not present, the company had net losses of $149 million.

What I am most worried though is the interest coverage for AMC. This financial ratio is calculated by dividing EBIT by the company’s interest expense and is a measure of liquidity and financial strength. The higher the ratio, the better for any company. It indicates that the company can pay its interest expenses on outstanding debt with its operating profit.

A dramatic decline has happened for AMC and its interest coverage ratio. In 2015, the interest coverage ratio was 2.54, while in 2019, it was 0.50 and for the trailing 12 months is was -9.24. This -9.24 is not sustainable and can lead to bankruptcy.

According to GuruFocus, AMC Entertainment Holdings Altman Z-Score is -1.01 (as of March 15) and that means distress and bankruptcy possibility in the next two years.

Popular But Not Attractive

The book value per share has also declined too much in the past five years. Book value per share is an indication of the valuation of the stock. In 2015, it was $15.58. For the trailing twelve months itstands at $-8.51. Not a good number. And certainly, it does not make AMC stock a bargain stock. On the contrary, a negative book value per share makes the stock too expensive.

Investing is about changes in forecasts and future returns, a dynamic process. The launch of VanEck Vectors ETF Trust – VanEck Vectors Social Sentiment ETF (NYSEARCA:BUZZ) is an ETF that will focus on meme stocks, hot stocks in social media and headlines as an investment strategy.

This ETF may contain AMC stock. But ignoring the valuation metrics is not the argument to rush in and invest. I am not saying that this ETF cannot perform well. But I do not like the investment philosophy, and for sure I do not like AMC stock.

Tough Times Ahead

A popular proverb, “When the going gets tough, the tough get going,” now applies to AMC stock. The management of the company decided to take action and make significant changes to its capital structure. But there is too much risk now.

The reopening of the global economy is positive news for the company. But at the latest stock price, and with a weak financial strength, investing in the stock seems too risky. Do not get carried away by its meteoric stock price in 2021. It is not cheap. On the contrary, it is too overvalued. And the debt level is too worrying. Wait for some quarters to evaluate the return to normality should you decide to invest in AMC stock.

Meme stocks hardly ever are growth stocks or value stocks. Prudent investors see the management’s optimism for AMC and the latest economic results are far from inspiring. Choose wisely.

On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/amc-stock-why-this-meme-stock-is-just-too-risky/.

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