I am bearish on AMC Entertainment (AMC), as its sky-high stock price is sharply disconnected from its weak business fundamentals and outlook.
AMC Entertainment is the largest movie theater business in the U.S., with over 950 theaters across the world.
The company offers top-rated amenities, such as its signature power recliners, dine-in theaters, MacGuffins bars, loyalty and subscription programs, premium large format movie presentations, and more. (See AMC stock charts on TipRanks)
Strengths
AMC Entertainment is not just the biggest theater company in the United States, but it is also the largest in the entire world, with 10,500 screens in total.
Driven by innovation, the stock has a large and loyal fan base that went into a meme stock frenzy, driving AMC’s stock price to a record high and helping the company avoid bankruptcy.
In fact, AMC Entertainment’s shares increased by over 1,500% in January alone. The company has also reached an exclusive agreement with Warner Brothers to feature all of the studio’s 2022 works in AMC Entertainment’s theaters for 45 days.
Recent Results
The company’s second quarter fiscal 2021 report showed revenue of $444.7 million, which beat the expected revenue of $382.1 million. The company also had narrower-than-expected losses per share of $0.71 versus the $0.91 expected.
AMC announced that around 22 million people visited its theaters during the second quarter of 2021, which showed an increase of 7 million from the second quarter of 2021; however, this number was still way less than the pre-pandemic figures.
As of June 30, the company announced it had $1.8 billion in cash, and $2 billion in liquidity available. AMC will be using the raised cash to rent or buy new theaters, and will upgrade its existing theaters with improved amenities.
Although CEO Adam Aron expects more challenges ahead, he said the company would be able to post positive cash flows by the fourth quarter of 2021, if the domestic box office reaches $5.2 billion. Having exclusive Warner Bros content in theaters for a month and a half should also help AMC’s profitability.
Valuation Metrics
AMC’s stock looks very expensive right now given that the company itself is unprofitable, and faces significant disruption risk.
For example, the company trades at 137.3x forward EBITDA, and generated a net loss of nearly $4.6 billion in 2020.
Wall Street’s Take
From Wall Street analysts, AMC Entertainment earns a Hold analyst consensus based on zero Buy ratings, three Hold ratings, and one Sell rating in the past three months.
The average AMC price target of $11.75 puts the downside potential at 65.7%.
Summary and Conclusions
AMC Entertainment looks very expensive here, given its weak business fundamentals and steep losses, despite a stock price that is still near all-time highs thanks to the retail investor frenzy.
While there is no telling how long this frenzy will last, or if the stock might even go higher from here in the short term, prudent value investors with a long-term orientation look like they might lose significant sums of money over time.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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