For a few weeks, Reddit’s r/WallStreetBets kept the buying pressure strong on AMC Entertainment (NYSE:AMC) stock. But when the Nasdaq started to lose momentum late last week, AMC stock started to lose its hold on the $60 level.
Short interest, an indicator of bearishness, is at 16.6%. The more shares fall, the more bears gain.
AMC might not have the fundamentals to justify its current stock price. For example, on July 6, AMC’s CEO Adam Aron tweeted:
“It’s no secret I think shareholders should authorize 25 million more AMC shares. But what YOU think is important to us. Many yes, many no. AMC does not want to proceed with such a split. So, we’re cancelling [sic] the July vote on more shares. And no more such requests in 2021.”
Investors will vote on July 29 at the annual AMC shareholder meeting. Instead of rallying after the good news, shares fell to as low as around $40.00.
Ironically, the cancellation of boosting shares by 25 million is a negative development. Insiders sold millions of dollar’s worth of shares already. From here, retail investors will have more control over how AMC requests financing.
AMC would have benefited from selling the 25 million shares, raising up to $1.82 billion in cash at the stock’s $72.62 peak. Now, it does not have a clear path to pay off its debt.
At the end of the first quarter, AMC had already raised equity and debt. It deleveraged $1.255 billion of debt, through lender forgiveness or a debt-to-equity conversion.
In the period, the company sold around 17.5 million shares, raising $172 million at an average price of just $9.77 a share.
A Closer Look at AMC Stock
AMC ended the quarter with deferred rent obligations of around $470 million. It has an average of 27 months to repay the amount owed. The cost is not yet a concern. In some cases, it had agreements for a repayment period that is more than 10 years.
In the chart right, the AMC stock price traded in a range for a few weeks but the moving average convergence divergence (or MACD) crossed over. Technical analysts read this as a “sell” signal.
The movie theatre re-opening should add cash flow for the company. But landlords may renegotiate payments coming in sooner if the movie business heats up.
Its demands are fair.
The increasing risks of a more deadly and transmissible variant of Covid may lead to another pandemic and lockdown. AMC and its landlords benefit from blockbuster movie releases driving audience traffic. Furthermore, if cities like New York raise their capacity limits to above 50%, AMC may report better revenue in the next quarter.
Covid, Reopening and AMC
The government may re-impose restrictions if the pandemic worsens. This time, they may look at AMC as a relatively safe destination for people.
Last May, AMC fitted its locations with air filters in its HVAC systems. It added cleaning and sanitizing, wipes and gels, masks and social distancing. Since airlines are operating at higher passenger traffic and cruise ships are open again, governments should allow AMC to keep operating at bigger capacities.
AMC Entertainment’s valuations are the biggest near-term risk for investors. Reddit’s subgroup wanted to short-squeeze hedge funds. They bought the stock in droves, driving the share price up by over 2400% from 52-week lows.
AMC is still billions of dollars away from the over $5 billion in annual revenue rates. Its glory years between Jan 1, 2017 and Dec 31, 2019 may never return. The pandemic may have permanently shifted moviegoers to the couch at home. Streaming television shows and movies may appeal to people more than going to the theatre.
Fortunately, people are habitual and may crave watching blockbuster movies in a live theatre. They may miss the smell of popcorn while enjoying carbonated beverages with friends. When the company reports quarterly results next month, investors will look for a strong rebound in revenue.
According to Stockrover Research, the average analyst price target is only $7.13. Based on its enterprise value to sales, the stock’s fair value is $57.52.
AMC stock may regain lost momentum ahead of the annual meeting. Investors who missed the nice rally may still want to stay on the sidelines. The company needs big-ticket sale revenues to justify its impressive run-up.
On the date of publication, Chris Lau 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.