AMC Entertainment (NYSE:AMC) stock been on a rollercoaster ride so far this year. The r/WallStreetBets community turned the investment world upside down by joining forces to bid up AMC stock, boosting the price by nearly 3,000% at one point in the year via short squeezes. These wild swings in price have in fact become a virtual showdown between retail traders and several prominent hedge funds on Wall Street.
Yet, the past few weeks have shown that the short-squeeze momentum is possibly fading away. AMC shares currently hover around $35 territory. In early June, they hit a record high of $72.62. Yet, despite the recent rapid decline, AMC stock still remains up over 1,500% year-to-date (YTD).
Meanwhile, management took advantage of the spectacular spike in the stock price by selling shares to generate cash. AMC raised $1.2 billion in cash via equity offerings in the second quarter alone. However, even after the recent cash injection, the company isn’t financially out of the woods. Although AMC increased its total liquidity to over $2 billion, it still has $5.5 billion in long-term debt.
The stagnation of the movie business during the past decade — especially during the pandemic — and the surge of streaming services are restraining the upside potential for AMC stock. As a result, it isn’t easy to see a bright future for AMC shares. The speculative activity could be quite dangerous, especially for retail investors who stand to lose a considerable amount of money trying to follow the crowd. Long-term investors looking to generate solid returns could find better deals on the Street. Here is why.
How Recent AMC Stock Earnings Came
AMC is the biggest movie theater chain in the U.S., with over 11,000 screens in approximately 15 countries. AMC stock price initially plunged to around $2 at the height of the pandemic. While rival shares like Imax (NYSE:IMAX) and Cinemark (NYSE:CNK) got hit as well, they fared better than AMC Entertainment.
AMC released Q1 financial results in early May this year. AMC’s first-quarter revenues plunged about 84% year-over-year to $148 million. Net loss of $567 million was regarded as an improvement, compared to $2.18 billion in the prior-year period. AMC burned through $313 million in cash during the quarter.
Current market capitalization for the company is around $19.6 billion. At the current price-sales ratio of nearly 15x, AMC stock looks extremely overvalued for an unprofitable company struggling to grow.
2021 became the year AMC Entertainment was saved by Reddit investors. However, the quarterly results clearly showed the company has a difficult path ahead. Most analysts do not have any positive expectations for the upcoming Q2 earnings report to be released next month.
Movie Ticket Sales Continue To Struggle
The movie industry was already struggling even before the pandemic started. Though box office totals have grown, movie ticket sales in the U.S. have been steadily declining for nearly two decades. The Covid-19 pandemic only exasperated the situation, as ticket sales declined over 80% in the past year. Market analysts don’t expect ticket sales to rebound to pre-pandemic levels anytime soon.
Streaming services are playing a pivotal role in slowing down the recovery of the movie theater business. Due to their pricing advantages, Netflix (NASDAQ:NFLX), Disney+ (NYSE:DIS) and HBO Max offered by AT&T (NYSE:T) continue to expand their user bases amid the pandemic.
Companies like Warner Media and Disney are currently simultaneously releasing their movies in theaters and on their streaming platforms. There are hardly any long-term tailwinds for the company.
The Bottom Line on AMC Stock
Bloomberg reported last year that AMC Entertainment was facing prospects of filing for Chapter 11 protection by the end of 2020. In fact, unsecured bond prices currently indicate that there is a significant risk of default. Moreover, to remain solvent, AMC will need to increase attendance, which has plummeted from pre-pandemic levels. That might be unrealistic to accomplish in the current environment.
The stagnant movie theater industry is unlikely to compete with streaming services. I do not expect AMC to recover its movie ticket sales to pre-pandemic levels or improve its top-line performance anytime soon. Put another way, fundamental metrics do not justify the company’s current overstretched valuation. Therefore, AMC stock cannot start a new bull leg up any time soon. Investors should put their capital into other robust shares the Street offers.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.