I think it could be relatively easy to be misled into believing AMC Entertainment Holdings (NYSE:AMC) stock makes sense now. There are a few overarching reasons investors might mistakenly conclude that AMC is on the up-and-up. However, I’d caution against buying into those narratives.
But first, we need to understand what those narratives might be in the first place. Then we can understand why they logically make little sense.
Let’s start with the first one, which is that AMC stock makes sense as a rebound play as the pandemic wanes.
Rebound Play?
The narrative that AMC is a prime candidate rebound play could understandably sound compelling. After all, AMC Entertainment Holdings is the largest movie theater chain globally.
And consumer demand for movie going experiences is certainly pent up after having been locked inside for the better part of two years, right? So, combine latent demand for movie theater experience and the world’s largest theater chain. That’s the bull thesis for AMC stock. Isn’t that logical?
Well, consumers certainly want to enjoy normal daily activities they were accustomed to prior to the pandemic. And they’ll go to AMC theatres given that it is the largest chain. But the problem is that it doesn’t translate to revenues increasing beyond pre-pandemic levels.
Let’s simply compare AMC stock prices and revenues pre-pandemic and projections moving forward. That simple juxtaposition shows why AMC will leave many holding the bag sooner or later.
Can’t Continue
A lot of people who love AMC won’t love me for what I’m about to say: AMC is going down sooner or later.
But before you jump in and buy shares for $22 now in the hopes they’ll shoot up to $60 again, be forewarned: AMC stock traded for much less when it made more revenue in the past. It’s projected to make less revenue in 2022. So why should it trade at massively inflated prices?
It shouldn’t. Here’s what I mean.
2019 and 2022
At the end of 2019 AMC stock traded for $8.05. And the company recorded $5.471 billion in revenues that year.
In 2022 AMC Entertainment Holdings is projected to record $4.61 billion in revenues. It currently trades for $22 per share. So, let’s assume that the $22 price holds throughout 2022.
That would mean that AMC stock prices increased roughly 173% on revenues that decreased by 15.72%. It doesn’t make any logical sense for that to have happened. Yet, that is where we currently stand.
When other writers and analysts make the claim that AMC is wildly overpriced, this is essentially what they mean. There’s no precedent for AMC shares to trade this high for long. They will revert to the mean at some point.
Meme Stocks’ Troubles
AMC is one of the chief meme stocks. It, along with GameStop (NYSE:GME), gained a lot of attention in 2021. But that was a different time because money was cheaper.
With the Fed signalling that interest rates will soon be rising. AMC holders should beware. Capital won’t be flowing into AMC with the ease that it did last year. Money is tighter, cheap money won’t be available as it was in 2021.
Simply put, higher interest rates make money more expensive. Because money is more expensive, there is likely to be less and less speculation within the markets. Investors will be pushing less capital into AMC – as a speculative stock – and its prices won’t be buoyed as well as they were in 2021.
So, in my mind there’s a double whammy coming for AMC. Investors should realize, one, that revenues aren’t increasing moving forward. 2022 will be weaker than 2019. And two, market forces dictate that capital shouldn’t flow into AMC shares in 2022 at the levels it did in 2021. Thank the Fed for that if you’d like.
But either way, steer clear of AMC in 2022.
On the date of publication, Alex Sirois 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.
