As I write this, the capitalization of AMC Entertainment Holdings, Inc. (NYSE:AMC) is changing somewhat chaotically in after-hours trading. Still, the upside is not going lower than +50% [at one point there was even a doubling]. Why is this happening? A Delaware court rejected a settlement that paved the way for a share conversion, Seeking Alpha News reported on Thursday last week:
The rejected settlement was meant to help AMC raise more money, but the court said it could not be approved as is. This news excited some retail investors (the “Ape Army”) who believed in the company and its potential – their enthusiasm prompted the crowd to buy AMC stock and short-sellers to cover, which drove up the share price so significantly.
But does it make sense now to follow the crowd and buy AMC stock to take advantage of the abnormal uptrend? Let’s figure it out.
AMC Stock Is A Double-Edged Sword
AMC Entertainment Holdings, Inc. is a company in the theatrical exhibition business. It owns, operates, or has interests in 940 theaters in the United States and Europe [as of 2022]:
Moviegoers at AMC Theaters-operated theaters totaled ~200 million in FY2022 [based on Statista], up from 128.55 million the year before. However, the 2022 figure is still well below the 356 million reported in 2019, before the COVID-19 outbreak. Zooming out further, we see that attendance at AMC theaters declined 63% between 2017 and 2021. As a result, AMC’s net loss is still a major problem for the firm:
Faced with this dramatic change in moviegoers, AMC’s management faced the challenge of financing operations. As far as I can tell, they chose to increase equity over taking on debt, steadily diluting the shares of existing shareholders [the share price has fallen by >50% in the last 5 years]:
This is why the news that AMC will not be able to dilute in the near future has caused so much excitement among investors, especially amid the sharp increase in short interest in the meantime.
Financially, the situation is still not looking good for AMC – at the level of operating profit, the company still struggles to break even. But the cash on the balance sheet should be sufficient for another 3.5 quarters – it’s unlikely that the company will delay raising new funds for that long, but in my opinion, another 3 months without dilution could turn out to be a base case scenario.
Because of the recent court ruling, the supply of shares has hit a kind of limit, so to speak, at least for a short time. That is why speculatively, I’d consider buying AMC stock because my further research shows that moves like the one we are seeing now in after-hours trading do not end with a one-day pump. It is usually a short-term swing move that lasts at least a few trading days. Let me show you some charts.
I would like to point out again that this is just the speculative side of AMC – in the end, each pump led to a bursting of the formed bubble, when fundamentals again took over from market sentiment and apes’ excitement:
I may be wrong, but AMC’s offline cinemas are gradually giving up their share to online cinemas and various services, and this started before the pandemic and subsequent closures:
Industry experts predict that this trend, initially accelerated by the pandemic, will gradually continue over the next few years. Judge for yourself – according to a recent report by Grand View Research, the global video streaming market is expected to reach $416.84 billion by 2030, registering a CAGR of 21.5% between 2023 and 2030. This growth will be driven by the increasing popularity of streaming services such as Netflix, Hulu, and Amazon Prime Video. These services offer a wide selection of movies and TV shows and can be accessed on a variety of devices including smartphones, tablets, and smart TVs. At the same time, the offline cinema market will grow much more slowly:
For this reason, I would not buy AMC shares in the long term, because even now – before the post-market price increase materialized – we see a strong overvaluation, in my opinion:
AMC’s forwarding EV/EBITDA of 34.47x is even higher than Netflix’s (NFLX) one [26.58x]. The latter firm is cheaper despite being more stable financially and operationally – the relative overvaluation of AMC is evident with the naked eye I believe.
I think a return of the apes to the market is the most likely scenario after AMC stock rose more than 50% from Friday’s close. The rally is likely to last for a few more days, and the stock could continue to force short sellers to cover, fueling the upward movement on the way to new local highs. However, this cannot go on for too long. In the longer term, AMC stock is likely to fall off the cliff again due to its poor fundamentals.
Since my short-term view does not match what I see for AMC in the long term, I rate the stock a Hold today. I urge all speculators not to forget the stop-losses when buying AMC and wish all long-term investors good luck in selecting other companies for their portfolios.
Thank you for reading!
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