AMC Entertainment Holdings (NYSE:AMC), the world’s largest movie theatre operator, has been one of the more talked about investments this year. The buzz surrounding AMC stock has all to do with the stock reaping the benefits of attaining meme stock status. Despite its deplorable financial positioning, the stock is has generated an incredible 1,160% in returns in the past six months. With a massive debt burden and a flailing business model, the stock has virtually no long-term case. However, retail investors could rake in some short-term gains by keeping tabs on r/wallstreetbets and other Reddit forums.
Before the Reddit-induced short squeeze early this year, AMC stock was trading in the penny stock territory. However, it soon started posting dumbfounding gains in late January before crashing down to Earth in mid-February. It started to build momentum again in late May, gaining over 350% in the past month. Mean estimates suggest that the stock is valued roughly 90% higher than its actual price targets. Moreover, it’s naturally overvalued across all price metrics, making it nothing more than a speculative short-term play.
Unsustainable Business Model
In the past couple of stories covering AMC, I talked about how its business model needs to evolve to survive in the future. Theatre revenues saw a modest improvement pre-Covid 19 but were mainly driven by an increase in ticket prices. Ticket prices cannot keep increasing forever, and AMC and other theatre operators must improve attendance numbers.
U.S. movie attendance has been declining for several years now, with the increase in home entertainment options. However, in the past few years, the rise of streaming platforms has complicated things to the point of no return. Major production houses have recently announced that they will be simultaneously releasing their content lineup on OTT platforms and theatres. Therefore, things are likely to get from bad to worse for AMC.
Experts have talked about few solutions to AMC’s predicament. One possible move could be industry consolidation, whereby it could be better positioned to stave off the streaming revolution and negotiate studio fees. Moreover, it could also introduce a subscription model with several perks and privileges for its members. Regardless of these solutions, it’s clear that the company has its work cut out for it in kickstarting a turnaround.
Massive Debt Burden
Its dismal balance sheet further amplifies AMC’s woes. It ended 2020 with $5.7 billion in long-term debt, $2.4 billion in other long-term liabilities, and another $5 billion in leases. Moreover, it also had $1.6 billion in current liabilities.
However, the Redditors came to the company’s rescue propelling the stock to new heights. AMC made hay while the sun was still shining and sold 11.55 million shares for $587 million, in addition to $659 million in equity raises that took place in the prior quarter. Hence, its net equity gain exceeds $1.20 billion.
However, the gain hardly 10% of its net long-term liabilities, and AMC will not be able to net future cash flows as a result. Forward operating cash flow forecasts are at a negative 50% at this point. Moreover, it has a negative cash balance of $1.26 billion with a levered free cash flow margin of a negative 202%.
Bottom Line On AMC Stock
The retail trading frenzy saved AMC stock from potential bankruptcy and continues to push it into relevancy. From a fundamental standpoint, AMC is as bad as it gets, with an incredibly bleak outlook. Therefore, it remains a purely short-term speculative play for retail traders to generate profits from its next major swing. Its short ratio is at a lofty 22%, suggesting that the next wild swing in its price could be around the corner.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines