Movie theatre chain AMC Entertainment (NYSE:AMC) enjoyed a decent run-up in its stock price in early September. AMC stock gained more than 13% as more than 2 million visited its theatres over the extended Labor Day weekend.
However, attendance was significantly lower than 2019 levels and AMC’s valuation is driven primarily by wishful thinking that the company could perhaps return to pre-pandemic levels in the foreseeable future.
That is unlikely to happen anytime soon, making AMC stock a highly unattractive investment.
This year, retail investors dominated the stock market and one of their darlings was the beaten-down movie theatre chain. From the beginning of the year, AMC stock has gained a whopping 1,714% in value. However, it seems that the short interest in the stock is too low to execute a squeeze. Moreover, retail traders will find it tough to push AMC’s stock with such a massive share count.
Short interest in AMC stock has kept it alive in the market, and in many ways, allowed the company to stave off bankruptcy concerns.
Bankruptcy Concerns Loom Over AMC Stock
A look at AMC’s weak balance sheet numbers suggests that it could file for Chapter 11 bankruptcy protection. At the end of June, it had $1.81 billion in cash and $212 million from its credit facility. Though these numbers may seem reassuring at first, it’s important to understand that the company has fewer than 1 million shares that it could issue without shareholder approval.
Moreover, it has $5.48 billion in corporate borrowings along with $4.89 billion in lease liabilities. AMC plans to pay $2.51 billion in lease liabilities along with $420 million in deferred rent from cash in the coming months. However, it has just $2.023 billion in liquidity at this point.
On top of that, it’s far from being cash flow positive. In the first six months of this year, it burned over $570 million in cash. Even in its best years, it never generated more than $579 million in cash flows. AMC has nearly $1.1 billion in debt maturing in 2026, and if it cannot generate record-breaking cash flows, it will have to restructure its existing debt.
Long Recovery to Pre-Pandemic Business
Though a rebound in attendance numbers was expected in 2021, with the easing of coronavirus restrictions, the question is whether they can return to pre-pandemic levels. Attendance numbers were down 52.4% from the prior-year period in the first half of the year. There was a sharp decline in international visitors with more than a 76% drop in Europe and the Middle East. Based on these results, recovery to pre-pandemic levels will be long and cumbersome.
Moreover, the theatre business is losing traction due to streaming services’ widespread success, which limits its upside potential. Billions of dollars are being poured in on creating more content by various OTT platforms to lure new customers.
AMC’s attendance numbers have improved of late, but its valuation is unjustified. It currently trades at over 12 times forward sales, and even if its attendance surpassed pre-pandemic levels, it wouldn’t be able to justify its valuation.
The Bottom Line on AMC Stock
AMC stock has been driven by irrational activity of meme stock traders who believe it could mount an astounding comeback. However, the chances of that happening are quite slim especially considering the state of the movie theatre business.
The meme stock buzz is starting to fade away with AMC, as investors have turned their attention toward its crippling fundamentals. Moreover, the uncertainties surrounding the pandemic and AMC’s mounting debt load are massive concerns that will weigh down AMC stock.
Therefore, it’s a no-brainer to avoid a long position in AMC stock, especially at current levels.
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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
