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Investors Cannot Ignore this One Red Flag on AMC Entertainment

AMC Entertainment’s (NYSE:AMC) stock ride to fame in 2021 is drawing to a rapid close this year. Meme trading lost its influence on markets after several failed attempts to lift AMC stock. Hopeful speculators are still holding AMC in the faint hope that the stock will rise again. Yet the latest insider selling is one red flag that shareholders cannot ignore.

amc enertainment stocks
Source: QualityHD / Shutterstock.com

In a SEC filing, Chief Executive Officer Aron Adam disclosed another 312,500 share sale. Although it is a prearranged trading plan as part of Rule 10b5-1, CEO Adam’s tweet is hardly reassuring.

AMC Stock Under Pressure

CEO Adam sold another batch of AMC shares, which would contradict the tweet that “I am in.” He already sold around $40 million worth of shares before that. He now only has 205,086 shares left, plus many more shares vesting. If shares fall to the single digits again, the CEO will not lose much since he already cashed out.

AMC will have a tough time relying on fundamentals to support its stock price. It must first convince markets that its business is sustainable. Fortunately, Spider-Man: No Way Home surpassed the $1.5 billion box office total.

In December, AMC said around 1.1 million watched the movie at the opening. At $13.69 per adult, AMC posted up to $15 million at the opening. Yet at a market capitalization in the billions, investors are paying at least seven times price-to-sales for AMC shares.

AMC still faces two major hurdles ahead.

Two Risks

Currently, health organizations do not have an effective vaccine against omicron, the less dangerous variant of Covid. Although people infected with the variant are less likely to need hospitalization, the virus is spreading quickly. More people are calling in sick for a few days. The airline is facing temporary disruptions due to the virus.

AMC will need several blockbuster movies to convince people to go to theatres. Conversely, people may avoid the movie theatre until hospitals have antiviral pills available for treating omicron.

Studios may double down on their efforts to simultaneously maximize movie revenue and grow subscriptions for streaming services. This strategy would dissuade moviegoers from buying movie tickets.

To AMC’s benefit, studios favor movie releases and a delay in a streaming release. For 2022, Disney (NYSE:DIS), WarnerMedia, and Sony/Marvel will release more movies in theatres. After the success of Spider-Man, studies are already planning to release titles on streaming services after a theatrical 45-day window.

Bearish Analysts

On Wall Street, analysts rate AMC shares as either a ‘hold’ or a ‘sell.’ According to Tipranks, the average price target is around $8.00. MKM Partners is even more bearish, setting a $1 price target on the stock two months ago.

In the most optimistic scenario, readers may build a 5-year discounted cash flow model: revenue exit. Assuming a consistent 25% annual revenue growth rate, AMC would post revenue of nearly $4 billion by fiscal year 2025:

(USD in millions) Input Projections
Fiscal Years Ending 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec
Revenue 1,242 1,553 1,941 2,427 3,033 3,792
% Growth -77.30% 25.00% 25.00% 25.00% 25.00% 25.00%
EBITDA -1,067 -225 0 364 758 948
% of Revenue -85.90% -14.50% 0.00% 15.00% 25.00% 25.00%

Model courtesy of finbox

Even with those assumptions, the model will warn readers that the automated checks are failing. AMC needs to reverse from a nearly 80% slump in revenue to a positive 25% increase in year-on-year growth.

Investors need to forecast that AMC’s customers will return to theatres in the coming years. We do not know if the pandemic will become an endemic by then. The model also assumes that movie studios will have at least a handful of blockbusters every year from here.

Related Investments

Entertainment and communication services stocks like ViacomCBS (NASDAQ:VIAC) and Comcast (NASDAQ:CMCSA) are trading at steep discounts. VIAC stock trades at a price-to-earnings in the single digits. Comcast’s P/E is in the teens.

Disney trades at a forward P/E of around 30 times. While the Disney+ service is a long-term growth opportunity for investors, Disney’s theme parks are the prize. More parks are reopening. As the pandemic risks ease, investors get diversified exposure to the entertainment sector through Disney stock.

Cinemark Holdings (NYSE:CNK) is another theatre chain that trades at a fraction of AMC’s market capitalization.

Bottom Line

AMC’s meme trade came and disappeared in the last year. The Reddit subgroup may re-organize another rally around the stock. Yet the CEO’s huge stock sales will hurt the stock-buying movement. AMC needs to post a profit sooner than my model predicts. That might win back some market support for its shares.

On the date of publication, Chris Lau 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.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. 

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/investors-cannot-ignore-this-one-red-flag-on-amc-entertainment/.

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