Shares of movie theater operator AMC Entertainment (NYSE:AMC) have been at the forefront of the meme stock mania. AMC stock is grown by a colossal 1,440% since the beginning of the year due to the Reddit retail trading frenzy.
However, AMC stock has under immense pressure in July, having lost more than 35% of its value. It appears the market is more prepared to ignore the hype and look at its actual performance.
AMC had a disastrous 2020 for obvious reasons. The pandemic has also led to what many believe is a paradigm shift in the entertainment business towards over-the-top (OTT) platforms. Additionally, with its theaters closed across the country, the company had also considered the possibility of filing for bankruptcy.
However, with the meme stock phenomenon becoming a factor this year, AMC could steer itself out of its financial mess. Nevertheless, with an incredibly bleak outlook, deplorable fundamentals, and unreasonable price, AMC stock is highly unattractive as an investment.
One of the biggest problems with AMC stock is its worrying outlook at this point. Domestic box office numbers languished at 65% in June this year, from the prior-year period. However, the number was an improvement on a sequential basis from the 81% drop in May.
Despite the improvement, streaming remains a thorn in its side. One of the highly anticipated Marvel Cinematic Universe, Black Widow, made $80 million in theaters in its first weekend. However, it registered a massive second-week drop-off of 67%, which could be attributable to the simultaneous streaming release of the movie.
Furthermore, the return to pre-pandemic levels is deeply impacted by the Delta variant of the Covid 19 virus. Current vaccines are potent against the new variant, though, and with more than 40% of Americans vaccinated, future lockdowns are low. However, it could again divert a sizeable amount of consumer spending to streaming.
AMC’s management believes that its business needs to operate at roughly 90% of pre-Covid 19 levels to remain solvent. That is an unrealistic goal at this point, as there’s enough reason to believe that its capacity will be considerably limited for the foreseeable future. Moreover, AMC’s liquidity of $1.25 billion isn’t nearly enough to pay down its massive long-term debt, which stands at $5.4 billion.
The movie-going business faces immense uncertainty in the post-pandemic world. The pandemic has had a deep impact on people’s entertainment habits and may have changed people’s perception about mingling with large crowds in general.
Perhaps one of the biggest risks for the company is that it may be forced to downsize in hopes of reaching profitability. AMC wasn’t even profitable during the industry’s peak in 2018 and 2019.
Moreover, AMC needs to find solutions to its negative cash flow situation. This is a major challenge for the company since it essentially needs to return to 100% pre-pandemic levels to achieve breakeven cash flows. At 90% attendance, it would have to reduce its interest costs by roughly half to reach breakeven cash flows.
Such a situation is not likely to transpire any time soon, which gives way for additional dilution if necessary.
Bottom Line On AMC Stock
AMC has capitalized on the meme stock mania to dispel bankruptcy concerns for now. However, it faces multiple risks which will continue to weigh down its top and bottom-line results. It faces a massive challenge from the rising cases caused by the Delta variant and the competition from OTT platforms.
Mean price targets for the stock suggest that the stock is overvalued by over 85% at this time. Hence, AMC stock is one to avoid.
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.