AMC Stock Could Resume its Downward Slide, So Watch Out

Right after Thanksgiving, when omicron and the Fed scared the markets, it appeared likely that AMC Entertainment (NYSE:AMC) was ready to capitulate. In my view, changes in market sentiment was going to be what finally took AMC stock, one of the meme stock legends, down to a price more in line with its fundamentals.

People wearing masks walking past an AMC theater.
Source: rblfmr/Shutterstock.com

But with excitement surrounding the box office numbers of Spider-Man: No Way Home, the selloff came to a halt. Shares also experienced a partial rebound, getting back above $30 per share on Dec 21. Since then, the movie theatre chain has given back these gains, and now trades for around $23 per share.

To some, it may seem as if shares have found the floor. However, it continues to trade at an inflated price. It also appears a “return to normal” for AMC’s business won’t arrive until (at least) 2023. With this, chances are shares have more room to fall.

Especially as the Fed’s hawkishness continues, “risk-off” keeps on coming back into vogue. Sure, many of this stock’s so-called “Apes” remain bullish. To them, a full recovery for its business is within sight. Then again, we may see more of them throw in the towel over the next few months.

The Latest With AMC Stock

Late last month, box office numbers for Spider-Man, plus Aron’s assertion that “movie-going at cinemas is back,” helped to renew some of the excitement for this meme play.

However, since the start of the New Year, AMC stock is no longer in comeback mode. In fact, its price action right before Christmas now looks like a “dead cat bounce” in hindsight. Like mentioned above, the stock’s now lower than it was before the Spider-Man news.

Now that it’s retreated back to the low-$20s per share, some may believe it’s at the point of bottoming out. As the above-mentioned box office numbers show, the pandemic is no longer scaring away movie-goers from cinemas. This is further bolstered by projections from Gower Street Research, which call for North American box office numbers to hit $9.2 billion in 2022.

While not a full return to pre-pandemic box office ($11.3 billion in 2019, according to BoxOfficeMojo.com), it’ll still be a big improvement from 2021’s total (around $4.5 billion). This, plus plans to refinance some of its debt, both point to better fundamentals for the underlying company. But like I discussed above, this doesn’t guarantee shares won’t see a move to even lower prices.

It’s Not Just ‘Risk-Off’ That Could Sink This Stock Lower

The shift from “risk-on” to “risk-off,” due to the Federal Reserve’s planned rate hikes, is a key market-related risk for AMC stock. If more speculative names continue to sell-off? Even die-hard “apes” who pledged never to sell may be compelled to do so.

However, along with this, there is something company-specific that may put pressure on it a few months from now. In a Tweet, Adam Aron discussed his desire to have the movie theater chain refinance some of its outstanding debt.

Doing so would be a positive for the company long-term. It would help bring down interest expenses. It would also help extend debt maturities, giving AMC more breathing room to complete its turnaround. However, while good for the company’s status as a going concern, the path to getting there may actually be bad news for shareholders.

Why? As a commentator at MarketWatch recently argued, when Aron talks about refinancing, he may be talking about convertible bonds. Since convertible bonds are typically the domain of hedge funds, a move like this may alienate many of the Reddit traders who still own it, who loathe them.

Also, if hedge funds buy up the convertibles, they’ll likely short the stock, in what’s known as convertible arbitrage. Yes, this could open the door for another short-squeeze, but it could initially mean another sharp move lower for AMC stock.

Bottom Line: Still Little Reason to Buy

I continue to be of the opinion that, like with GameStop (NYSE:GME), it’s all a matter of if, not when these top meme stocks collapse in price. I won’t try to predict when exactly they’ll each fall to a price more in line with their underlying value (in AMC’s case, single-digit prices). What I will say is that the odds of it happening continue to climb.

Despite the positive news stemming from the Spider-Man release, we’ve seen more news that points to lower prices ahead. The further move to “risk-off” will likely convince more “apes” to stampede out. If Aron’s scheme to refinance debt is to issue convertible stock? This too could push shares down to lower prices.

With these newest issues, which are atop longstanding concerns, there’s only one move to make with AMC stock: avoid.

On the date of publication, Thomas Niel 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.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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