AMC Stock Just Doesn’t Have What It Takes to Justify Its Valuation

AMC (NYSE:AMC) stock has had an epic run, but like all good things, this too seems to be coming to an end.

Image of the entrance of an AMC Entertainment (AMC) branded theater. undervalued stocks
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After consolidating in a large triangle pattern, AMC stock broke down a key support level of $34.60. The stock is currently trading at around $31, which is slightly below its 200-day moving average.

Momentum in AMC stock seems to be fading based on the result of its Moving Average Convergence Divergence (MACD). It can be seen that the stock is having difficulty resuming its upward momentum.

Furthermore, there has been a slew of good news for AMC stock that validates the original bullish thesis. However in my opinion this is creating a “sell the news” situation for AMC. Investors who were lucky enough to ride this train should consider locking in their gains.

Movie Ticket Sales Slowly Recovering

AMC was heavily shorted during the start of the pandemic due to the belief that movie theaters, in general, may not survive. It was not difficult to come to this conclusion.

At the time several prominent streaming services began experimenting with alternative distribution models. However, now that the pandemic is almost over, we can look at the data to see if people are beginning to return to their old movie-going habits.

Movies like Disney’s (NYSE:DIS) Free Guy, Shang-Chi and the Legend of the Ten Rings and Sony’s Venom: Let There Be Carnage have had decent box office results.

October 2021’s $3.2 billion in global box office revenue is only 4% less than the three-year 2017 to 2019 average. Despite smaller overall attendance and fewer ticket sales, movie theaters are here to stay.

Digging deeper into the data, it can be seen that older moviegoers and family audiences have not returned to movie theaters completely. Part of that can be attributed to ongoing safety concerns.

I however think that this trend is due to a shift in consumer habits. Streaming services have made major inroads into people’s homes. So it makes sense that big blockbuster spectacles belong on the big screen, while low-key, family-friendly affairs are seeing a lot of success in the home.

This is ultimately bad news for AMC as it implies that revenues will be less than it was pre-pandemic.

I believe that the revenue and earnings needed to support AMC’s $15.5 billion market cap may never materialize. Based on the company’s most recent earnings release, AMC had revenue of $763.2 million. This is around 6x more compared to the $119.5 million earned last year.

These results have surpassed market expectations. Analysts surveyed by FactSet had only forecasted revenue of $708.3 million.

At this time the vast majority of its theaters have returned to operations. In the quarter, AMC had all 596 domestic theaters open and approximately 99% or 351 international theatres open.

Therefore investors shouldn’t expect a revenue uplift from theaters re-opening in the next few quarters. All of the revenue will now be dependent on getting people back to the movie houses. A challenge I’ve alluded to above.

Your AMC Stock Takeaway

Despite having theaters open, AMC still lost money during the quarter. The company reported a net loss of -$224.2 million and an adjusted EBITDA loss of -$5.4 million.

Let’s use a “fair value” P/E ratio of between 20x and 25x to get the necessary Net Income to support AMC’s market cap.

Doing some simple math, we can see that AMC would need around $620 million to $775 million. This is quite a tall order considering given the headwinds the company still faces. I don’t think AMC stock makes sense as a long-term investment at these price levels.

On the date of publication, Joseph Nograles 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 Publishing Guidelines.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.

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