Shares of AMC Entertainment (NYSE: AMC) have taken investors on a roller-coaster ride in the last 15-months. First, the COVID-19 pandemic decimated movie theater stocks including AMC as economic lockdowns were announced all over the U.S. Then a group of retail investors on Redditt decided to take on hedge funds and bought shares of companies that had high short interest ratios and call options. Retail investors bet on beaten-down and fundamentally weak stocks such as AMC Entertainment, BlackBerry (NYSE: BB), and GameStop (NYSE: GME), thereby initiating a short squeeze and increasing the stock prices.
This meant AMC stock fell from $7.1 per share in February 2020 to $2.27 in April 2020. It then rose to a multi-year high of $20.36 in January 2021 and is currently trading at $14.65.
Now, Wall Street has a 12-month average price target of $4.86 for AMC stock which is 65% lower compared to its current trading price. According to Citi analyst Jason Bazinet, AMC shares are overvalued which led to the reiteration of a “sell” rating for the stock. Alternatively, B. Riley analyst Eric Wold raised the price target for AMC stock from $13 to $16 and maintained a “Buy” rating. Let’s see if which Wall Street analyst will be proved correct in the next year.
AMC Entertainment disappoints in Q1
In the first quarter of 2021, AMC Entertainment reported revenue of $148.3 million which was below Wall Street revenue estimates of $153.43 million. Its adjusted loss per share of $1.42 also missed consensus estimates of a loss of $1.3 per share.
During the earnings call, AMC CEO Adam Aron explained, “We finally can now say that we are looking at an increasingly favorable environment for movie-going and for AMC as a company over the coming few months.”
He added, “This is the result of a successful and steadily growing vaccination program in the U.S., Europe and the Middle East, especially so across the United States the proactive implementation of our comprehensive and effective AMC Safe & Clean protocols the arrival of long awaited new movie title releases movie-lovers who are eager to once again experience AMC's innovative array of loyalty programs and guest amenities as exciting movie titles are released theatrically to the big screen and a vocal, enthusiastic and avid new shareholder base comprised mostly of some 3 million individual stockholders."
While AMC is optimistic about its performance going forward, it is also grappling with a slew of structural issues which might negatively impact stock prices in 2021 and beyond.
Widening losses, huge debt and more
AMC confirmed that it ended the quarter with over $1 billion in liquidity. However, the company is also expected to report a net loss of $1.49 billion in 2021 and a loss of $400 million in 2022. It means the company will have to raise additional funds to offset the cash burn. In the last month, AMC raised $428 million in order to boost its liquidity. In Q1, AMC’s free cash flow stood at a negative $325 million which was almost $50 million higher than the prior-year quarter.
Another reason that might worry investors is AMC’s high debt balance. At the end of Q1, AMC had over $11 billion in debt and the company paid $151.5 million in interest payments in the last quarter. Comparatively, its interest payments were 50% lower at just $71 million in the year-ago quarter. It suggests the company will be paying over $600 million in interest payments annually raising bankruptcy concerns.
AMC stock is valued at a market cap of $6.53 billion. Comparatively, analysts expect it to increase sales by 94.5% to $2.42 billion in 2021 and by 98.2% to $4.79 billion in 2022 which means it's trading at a forward price to sales multiple of less than 3x. It is a steep multiple for a company that is posting massive losses each quarter. AMC in fact reported sales of $5.47 billion in 2019 which shows it will take more than three years for the top-line to reach pre-COVID-19 levels.
The bottom - line for AMC stock
We can see AMC remains a high-risk bet given the macro-economic challenges impacting the stock. However, even prior to COVID-19, AMC stock had grossly underperformed the broader markets. Between its IPO and the start of 2020, AMC stock was down 47% compared to the S&P 500 returns of 103% in this period.
The shift towards online content consumption remains a long-term risk for movie theater companies and the transition would have accelerated during the last year and a half.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
