AMC Entertainment Holdings, Inc. (AMC) is an American movie theatre chain, and it is the largest movie exhibition company in the world with about 950 theatres and 10,500 screens. Wanda Group purchased 5,048 AMC theatre screens in the United States and Canada for $2.6 billion in 2012 and owned a majority stake in the company until recently. However, AMC announced in January 2021 a new funding plan to raise $917 million to deal with the pandemic-related disruptions, which diluted Wanda’s ownership of the company. Further, the company declared that Wanda no longer has a controlling stake in AMC and that the company would now “be governed like most other publicly traded companies with a wide array of shareholders.” AMC shares have been on a tear of late gaining 3,000% since the beginning of the year at one point (now up 2,400% YTD) because of a series of short squeezes initiated by the Reddit community.
Exhibit 1: The share price of AMC
First-quarter earnings recap
The company released its first-quarter earnings on May 6 that missed both earnings and revenue estimates. The revenue for Q1 was $148.3 million, down 84.2% year-over-year and EPS was 4 cents per share. The domestic average ticket prices were up more than 11% year-over-year.
To improve its liquidity, the company raised $2.95 billion in Q1, which included converting $600 million in convertible debt to equity at $13.51 per share, $150 million in government assistance, securing more than $1.2 billion of creditor and landlord concessions, and $80 million from non-strategic asset sales.
Exhibit 2: EPS of AMC
AMC is under financial pressure
The coronavirus pandemic has caused chaos for AMC Entertainment’s operations over the last year. AMC generates revenue from admissions and food and beverage sales which declined in 2020 due to the COVID19 outbreak, but in reality, its financials were weak even before the pandemic. Due to the COVID-19 pandemic, AMC announced the closing of all of its theatres on March 18, 2020, and it began the process of reopening select sites in the United States on August 20, 2020, complying with health guidelines. The company upgraded its air filtration system and installed electrostatic sprayers, causing its cash reserves to deplete. According to the statement made by AMC in October 2020, the cash reserve “would be essentially exhausted by the end of 2020 or early 2021.” The company is expected to struggle until the economy returns to a certain state of normalcy. To keep its business running, AMC has been constantly issuing shares to raise funds.
AMC stock, which started the year at $2, has already increased by more than 2,000% because of the hype created by amateur investors. The company further announced an agreement to sell 8.5 million shares at $27.15 per share to Mudrick Capital which will allow the company to acquire additional theatre leases and improve existing theatres. In May, Wanda Group sold most of its remaining shares in AMC, but investors continued to bet in Reddit’s WallStreetBets Forum.
The sales have dropped as much as 99% in the last five quarters which would generally leave a company bankrupt. However, #SaveAMC trended on social media, creating a massive hype, and this allowed AMC to raise an additional $305 million from the stock market and reduce its debt by $600 million. Retail investors arguably believe that they can save the company from an imminent collapse by continuing to push the stock price higher, enabling AMC to issue new shares to raise funds. Even so, the company is still under financial pressure because of increasing operating costs.
With theatres opening, AMC is optimistic about its growth. The company expects to return to positive cash flow by the end of the year. However, even if theatres open, positive cash flow may not be attainable this year as movie theatres will face stiff competition from streaming platforms. Several companies have decided to distribute films in cinemas and on streaming platforms on the same day which will give customers an option to watch the same movies at an affordable price and from the comfort of their homes. AMC’s low liquidity could be a major obstacle to its expansion. It is already functioning at a lower capacity, and with rising costs for sanitization and sanitation, revenue may not be able to keep up. To stay in business, AMC will have to show strong financial health to manage the considerable debt it has taken on.
Takeaway
AMC stock may look appealing for short-term traders because of the significant volatility, and shares have risen so dramatically in such a short period, but a large price gain is especially concerning when it involves a company that has been experiencing financial difficulties. It is unclear whether AMC will be able to make a profit or produce positive cash flow because it is difficult to predict how long things will take to get back to normal or how many people will be willing to go to theatres. On the other hand, AMC is yet to open in all of its locations in the international market and several countries are still struggling to curb the spread of the virus.
The expected revenue is modest for the foreseeable future, and operating costs continue to rise. Even though the company avoided insolvency due to share dilution and the meme stock boom, generating positive cash flow appears to be a challenge.
Susannah Streeter, a senior investment and markets analyst at the UK investment group Hargreaves Lansdown said:
“We would advise investors to proceed with caution and avoid following the herd into hot stocks which are the subject of frenzied speculation. It is a highly risky strategy and people should only dabble at the edges of their portfolio with money they can afford to lose.”
AMC stock, at the current highs, seems distracted from the economic reality facing the company, and it would be best for investors to look for other potential opportunities without banking on a further Reddit-fueled rally from AMC stock.
Disclosure: The author does not own any shares mentioned in this article.
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