Some of the things that have happened in the last two years were incredible. The events that the pandemic brought had huge impact on Wall Street. We locked down the globe. Every crowd business on the planet completely shuttered its doors and for several months. This should have killed AMC Entertainment (NYSE:AMC) stock, but instead it broke records.
Today’s conclusion is that AMC stock is exciting to trade. However, long term the prognosis is still too bad for investing.
They survived the shock, but they are a long way from normalizing the business. This doesn’t reflect badly on management, since AMC theaters were empty for a year. They are now in the process of reopening back up, and the recovery will be tough.
What was surprising last year was the speed with which stocks recovered from from the 2020 lows. And in frequent cases, stock prices exploded into massive record breakouts.
AMC stock is at the top of the list of surprising facts around those events. The success of it post-pandemic is a riddle inside of a conundrum. The price action far exceeds the upside potential in the business.
The Business Was Already Sick
This company was already in trouble before the pandemic. Don’t take my word for it, just check the AMC stock chart.
After peaking in 2016, it sunk into a descending trend that didn’t end until the pandemic. From that 2016 top to the 2020 low it lost 95% of its value. This recovery is incredibly counterintuitive because its business took a huge fundamental hit from it. What is even more astonishing, they barely started rebuilding. The Reddit folks fell in love with it and took it the “da moon.”
The recovery process should present challenges.
First, there were no sales for months, so it will take time to rebuild momentum.
Second, while theaters were dark, new alternative habits emerged. There will be fewer people going back to movie theaters and that trend was already underway. Moreover, media companies had to find new outlets during the social distancing laws.
Streaming trends accelerated because of the outbreak. This is surely going to add to AMC’s business woes. The perfect example would be Disney (NYSE:DIS), because now they have their streaming product as an outlet.
I am not predicting complete doom for AMC, but it definitely does not warrant breaking into new highs. They did not find a pot of gold because of the pandemic.
Trade AMC Stock, Don’t Own It
Nevertheless, logic in this instant need not apply. I tried for a while, but it was extremely frustrating to justify the price action in AMC stock. I concluded that investors should focus on the range at hand, regardless of worth.
The buyers have consistently showed up around $33 per share. This makes them have support below that they could use to tackle resistance above. Sellers will be lurking above $44 per share. However, if the buyers can overcome that and break out of $52, the rally will really be on from there. They could even retest the all-time highs.
What the stock market in general does will affect this company because it cannot rally alone. The Reddit gang will try but it would be best that the indices are also rallying.
We cannot completely dismiss the risk of a crash in the stock, even independent of a Wall Street crash. At some point there will be judgment based on actual financial metrics.
Cash Can Be a Problem
Revenues for AMC are now a sliver of what they were before the pandemic. It is still losing almost $3 billion on a yearly run rate. At some point, they will need cash to cover their operation. Currently, they are running a big negative cash flow. That’s not the basis of a healthy business scenario for any company.
Luckily, borrowing rates are low for them to continue doing that for now. The company may even need to go to the equity holders and ask for the dilution. Since the stock is hot, they might as well use it as a piggy bank.
Fundamentally, this is a company that I wouldn’t touch with a 10-foot pole. AMC stock is tradable technically but not without strong charting skills. Regardless of thesis or method, AMC stock makes for a speculative bet. Therefore, the size of the risk should remain appropriate to that label.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.