AMC Entertainment (NYSE:AMC), the largest theater operator globally, has narrowly escaped bankruptcy after being clobbered by the pandemic. Yet, strangely enough, AMC stock has gained more than 75% in the past three months, with hardly any improvement in its fundamentals. The stock has been popular among retail traders since the start of the year, but even the short interest is evaporating now. Hence, its lofty enterprise value is completely separated from its financial positioning and troubling outlook.
Going into 2021, AMC punished its stockholders with massive debt and dilution. That said, the company did take advantage of the retail-trading frenzy at the start of the year and sold shares into the rally. Moreover, institutional creditors also converted their bonds to shares and pocketed handsome profits.
But AMC’s woes haven’t ended yet. In fact, with its colossal cash burn, the company recently filed for an at-the-market (ATM) equity offering to sell 43 million shares. CEO Adam Aaron believes that this equity offering will “more than satisfy AMC’s liquidity needs” for the rest of the year. However, what he doesn’t talk about is the irreparable damage that will be done to the stock.
So, with that all being said, let’s explore AMC’s story in a little more depth to understand where it stands.
AMC Stock Has a Poor Outlook
AMC was able to stave off bankruptcy concerns through secondary offerings that diluted AMC stock shareholders significantly. However, the reality is that it continues to burn cash at an incredible pace. Sooner or later, it needs to perform in a big way to alleviate its troubles.
The company’s first-quarter results for fiscal 2021 showed a burn of $483 million in cash to pay for its operational expenses. Revenues were also down more than 84% year-over-year (YOY) to $148.3 million. Finally, AMC raised roughly $1.2 billion through its stock offering and various new debt financing in the quarter.
Due to the online-streaming paradigm shift in the entertainment industry last year, I don’t expect AMC to return to pre-pandemic levels. For one, major production houses have opted for same-day releases on over-the-top platforms, representing a massive change in the sector. Therefore, AMC will probably have to raise more funds via the stock market to survive in 2022.
But that’s not all. In addition, the attendance rate has stalled for many years now and getting people into theaters will be doubly difficult post-pandemic. Plus, there are additional costs that theater owners have to bear, which will continue to weigh down their margins. Hence, bankruptcy is not off the table completely here.
AMC was among the names that benefitted greatly from the Reddit-induced short squeeze earlier in 2021. Despite having a tumultuous year, AMC stock is now up 137% in the past 12 months. Moreover, it has outperformed the S&P 500 by about 93% in the past one year as well. Meanwhile, though, its YOY revenue growth rate is at a deplorable negative 77%.
Today, analysts have a mean price target for the stock at $6.38. This is more than 34% lower than its current price. Additionally, its forward enterprise value to sales figure is at 5.81, about 107% over the sector median.
Finally, as I noted before, AMC stock’s short interest is also fading fast, a fact that’s apparent in the recent weaknesses in its share price.
Bottom Line on AMC Stock
AMC had been reeling from the pandemic before the recent retail-trading fiasco saved it from the brink of bankruptcy. However, bankruptcy is hardly off the table at this point, considering the company’s terrible outlook.
This name needs to find ways to attract customers in the long term, but hoping to return to pre-pandemic levels is wishful thinking. Ultimately, AMC would have to resort to secondary offerings again once it burns off its cash reserves without a substantial increase in revenues. All told, AMC stock is a definite sell.
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.