On Nov. 8, AMC Entertainment (NYSE:AMC) reported better-than-expected earnings and a smaller-than-expected loss. Yet, CEO Adam Aron warned of challenges ahead and AMC stock dropped more than 11% on the day. 

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The day after the earnings report, Aron filed with the Securities and Exchange Commission for the right to sell his 1.25 million stake in the company over the coming months. He sold half of that, or 625,000 shares, on Nov. 9.

Aron had warned investors the sale was coming back in August and again on the company’s earnings call, saying it was part of his estate planning.

Nevertheless, in the month since AMC’s earnings announcement and Aron’s stock sale, AMC stock is down nearly 35%. And investors shouldn’t be surprised if shares continue to head lower. This is the beginning of the great unraveling. In 2022, AMC stock could fall into the low $20s or even the teens.

The Bull Case for AMC Stock

In my previous article about AMC stock, I recommended investors follow Aron’s example and sell their shares. At the time, I noted that AMC stock had never traded above $40 until the 2021 meme-stock surge.

I’m sure the buy-the-dip crowd is licking their chops right now. And I sort of get it. 

InvestorPlace’s Mark Hake believes AMC stock could be worth $52.16 in 2022. To hit my colleague’s target, it has to generate positive free cash flow (FCF). It seems simple enough.

“Right now AMC has a market capitalization of $20.56 billion. But if we assume that free cash flow could hit 10% of sales next year, or $466 million, the market value could easily hit $23.3 billion to $31.07 billion,” Hake wrote on Nov. 19.

Hake’s premise is based on a FCF yield of 1.75% at the midpoint of his analysis. Assuming AMC hits $4.7 billion in 2022 sales, as analysts predict, that’s a market capitalization of $26.6 billion, 76% higher than its current market cap of $15.1 billion.

In just three weeks, Hake’s hypothesis has gotten even more enticing. However, before you jump in, take the time to consider some counterarguments.

The Bear Case for AMC Stock

For starters, I find the CEO’s comments about his planned trades to be incredulous. Rather than simply saying the trades were part of his 10b5-1 trading plan, something most CEOs do as a matter of course, Aron launched into an assault on the naysayers and people who wish AMC harm.

Who might these people be? I can’t imagine short sellers are sitting in their offices wishing harm on a corporate entity. That goes double for the people who work at the company. 

Short sellers are betting the company’s business model doesn’t have enough juice in the tank to justify a valuation of 7.5x sales today, down from nearly 27x in June. Over the past five years, it’s averaged 1.9x sales. 

At its historical average, and assuming AMC hits $4.7 billion in sales in 2022, we’re talking about an $8.9 billion market cap, or $17.32 per share. 

The reality is that, before 2021, the highest AMC stock traded was around $35 in 2015 and again in 2016. Since 2015, it has generated the following FCF:

The company’s best year for FCF in the past six was 2015. AMC’s revenue in 2015 was $2.95 billion. Its FCF that year was 4.5% of sales. In the first nine months of 2021, AMC had FCF of -$714.50 million. 

I have difficulty understanding how it gets to $466 million in free cash flow when it’s never done this since becoming a public company in 2013. I suppose anything’s possible, but in this case, I don’t see it hitting $466 million in FCF in 2022 or 10% of sales.

The Bottom Line on AMC Stock

The only thing that keeps AMC stock from falling back into the $20s or even the teens is continued buying by retail investors. However, the $70 million in share sales so far this year by AMC insiders suggest the stock’s best days are behind it. 

“If [insiders] don’t think it’s a good place for their capital, then shareholders should be concerned about whether it’s a good place for their capital,” Bloomberg reported Nell Minow, vice chair of ValueEdge Advisors, saying about the share sales.

For the various reasons I’ve mentioned here — valuation, trading history, share sales and lack of free cash flow generation — I think it’s possible AMC stock could be trading in the teens by this time next year.

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.