Reddit is having its way with AMC Entertainment (NYSE:AMC) once again. After a massive spike in January, AMC stock faded, only to nearly double in three weeks.
I’m sure some traders will have some more fun going forward. But, for investors, there’s simply no need to get involved.
Yes, AMC took advantage of the January spike to improve its balance sheet. But “improved” hardly means “strong.” And while investors see a potential boost from theater reopenings, the fact is that the long-term trends here remain sharply negative.
Simply put, this is a company that remains in real trouble. The same description applies to AMC stock.
The “Short Squeeze” Myth
The narrative surrounding AMC stock is that it’s been the beneficiary of a “short squeeze.” This narrative suggests that smart traders are buying AMC stock, forcing short sellers to cover their positions. This, in theory, only adds fuel to the fire.
The problem is that the narrative is flawed. At best, it has some truth. Options activity, which has been heavily weighted toward call options, is likely a factor. Short interest at the moment isn’t even that high.
Public data figures show that almost 20% of the float is sold short. But that data hasn’t caught up to reality. As of Mar. 11, according to AMC’s Form 10-K filed with the U.S. Securities and Exchange Commission, AMC had 450 million shares outstanding. Even if some of those shares aren’t available for trading, short interest is thus likely in the range of 13% to 14% of the float at most.
That’s not all that much. It’s not enough to create a squeeze.
Meanwhile, any trader short AMC stock at the beginning of the month had to plan for such a spike. They may have hedged with their own call options, or at least made sure to keep enough dry powder to manage through a short-term rally. No trader of size wandered into AMC without a plan to counter any potential squeeze efforts.
All that aside, there’s a bigger problem. Hoping for a short squeeze is not an investment strategy. Short squeezes are rare. They are, no pun intended, short-term. If you’re buying AMC stock on squeeze potential, particularly after the rally, you’re likely to wind up disappointed.
What We Learned From Q4
That leaves the fundamental case. There isn’t much of one, and Q4 didn’t help.
Obviously, we’re not learning too much from the revenue and profit figures. AMC’s top line fell 89% year-over-year, but the effect of the novel coronavirus pandemic was the primary cause.
We did learn a few things, however. Again, at Mar. 11, AMC had 450 million shares outstanding. The figure at Feb. 21, 2020 was 104 million.
Bulls would argue that the 300%-plus dilution helped the balance sheet. AMC has sold significant amounts of stock of late. It also saw one of its bondholders convert debt to equity.
Here’s the catch, though: The balance sheet still isn’t in great shape. Taking year-end 2020 figures and adjusting for stock sales and debt conversion announced so far in 2021, AMC still has debt of over $4 billion net of cash.
That’s only barely better than it was at the end of 2019. Essentially, AMC simply has managed to dilute its way toward offsetting the incredible cash burn it faced in 2020.
Meanwhile, the equity valuation has soared. At the end of 2019, AMC’s market capitalization was under $800 million. It’s now well past $5 billion.
In fact, as an investor noted last week, AMC’s market cap is at an all-time high.
Long-Term Pressure on AMC Stock
Simply put, that’s crazy.
This is a business that has been heading in the wrong direction for years now. Movie theater attendance hit a 25-year low even before the pandemic.
And bear in mind how the operating model works here. Empty theaters crush profits. The costs are all roughly the same. Getting one extra patron is essentially free money. Losing that patron comes off the bottom line at extremely high margins.
Now, this doesn’t necessarily mean that movie theaters are going to disappear. It doesn’t guarantee that AMC is going to go bankrupt immediately. But that’s not what we’re talking about here.
What we’re talking about is a company facing secular, multi-year pressures. That’s why AMC stock entered 2020 with its stock price at its lowest level ever following the 2013 initial public offering.
If the pandemic hadn’t arrived, the idea of a $5 billion-plus market cap would have been ludicrous. It’s even more insane now. Traders are going to do what they will, but investors need to steer clear of AMC stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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