AMC Entertainment (NYSE:AMC) had a rough 2020 and shareholders have been on a crazy ride so far in 2021. The stock is up 370% since Jan. 1. Thanks to some Reddit-driven hype, AMC stock hit $20 earlier this year before falling to $10 now.
The company recently announced a market offering program to issue shares of $43 million and it scrubbed off the previously announced plan to sell $500 million. AMC has been constantly raising funds through share issue to keep the business running.
Even after the Covid-19 pandemic ends, movie theaters will face stiff competition from streaming platforms in the country. Several studios have decided to release movies simultaneously in a theaters and streaming platforms. Audiences can enjoy the same movies from the comfort of their home and at a much lower cost. What would motivate them to walk into the theaters?
Besides the pandemic, there are other factors that can pull the stock down. Let’s dig deeper into them.
Heavy Cash Burn and Low Liquidity
AMC generates revenues through admissions and food and beverages across its theaters. In 2019, the revenue was flat and it went downhill in 2020. Fundamentals were worsening even before the pandemic.
On Feb. 28, the company held $1.1 billion in cash and $5.7 billion in debt. To keep the business on the ground, AMC Entertainment had taken debt at 15% interest and this cost has a huge impact on the liquidity. Additionally, the operating lease liabilities for the company at the end of Dec 2020 stood at $4.9 million.
The company also had rent obligations amounting to $450 million for 2020 that were deferred to 2021 and future years. It shows that the expenditure is only going upwards and the pressure on the company is building up.
Nothing beats strong fundamentals and the company is nowhere close to it.
This cash will last for nine months if the company burns $124 million a month. As per company guidance, it sees returning to positive cash flow by the end of this year. However, even if the cash burn declines to $50 million a month from the third quarter in 2021, it may not be possible to generate positive cash flow this year.
Not a Post-Pandemic Play
In a world prior to the pandemic, it may have been possible. But now it’s hard to believe that AMC stock can generate profits or positive cash flow. There is no certainty as to how long it will take to return to normal and how many people will be willing to walk into movie theaters.
AMC has not even begun operating all its locations in the international market and we do not know when it will begin. The pandemic is fairly in control across some nations, but it is not completely over. The revenue is low and operating costs are only piling up.
AMC has low liquidity and this could be a hindrance to the growth. It is operating at a lower capacity due to restrictions but incurring costs for sanitization and hygiene. Adding it all up, the costs are rising and the revenue may not match the same.
Generating cash for the company in 2021 looks difficult. The company has avoided bankruptcy through dilution of shares, but it has put the shareholders in a difficult situation. It managed to pay $600 in debt after the meme stock rally in January. But it does not take off a lot of pressure from the company.
Until customers feel safe to return to the theaters, AMC Entertainment will have to try its best to survive. Only strong financials can prove the worth of the company.
The Bottom Line
If you are looking for a re-opening play, avoid AMC stock. There are several other options that are less risky and priced to perfection. The trouble for AMC is far from over. Pacific Theatres and Arclight Cinemas already announced they will close due to the pandemic slowdown.
Despite the decline in revenue and growth over the past year, AMC has a market cap of $4.5 billion, which looks a bit stretched to me.
Whether moviegoers head to theaters this year or not, it is best to avoid the stock right now.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.