What happened
Shares of movie theater operator AMC Entertainment Holdings (AMC -0.92%) fell nearly 13% in early trading on June 25. By 10:30 a.m. EDT the stock had regained some of that loss, but it was still down a fairly significant 8% or so. The big story was, as usual these days, COVID-19. But there were some material second-order impacts that investors need to watch more closely.
So what
The U.S. basically hit the economic pause button in early 2020 in an effort to slow the spread of COVID-19. At this point, however, states are beginning to reopen, allowing nonessential businesses to operate again and softening their stances on social distancing. It hasn't been going very well, with several early-to-open states seeing a notable uptick in COVID-19 cases. It's entirely possible that current reopening efforts will be scaled back, put on pause, or -- worse -- reversed. Investors have been selling off companies that would be impacted.
Image source: Getty Images.
AMC is clearly such a company. Right now management is planning to start showing movies again in mid-July. That may not happen if health concerns lead to a more drawn-out reopening process. However, there's another factor that's important when it comes to movie theaters -- they are showing content created by other companies.
AMC, for example, has been pinning its hopes for a big reopening on the Disney movie Mulan. But that entertainment giant is rumored to be considering pushing out the movie's release date. AMC was already expecting to show older movies in addition to new ones; but if more movie releases get delayed, it's unlikely that it will make economic sense for the company to reopen as currently planned. And that would be particularly bad news for AMC, which is carrying a heavy debt load. At some point, it needs to start generating revenues again or it will be unable to support the leverage on its balance sheet.
Adding to the list of problems, major moviemakers appear to be considering changing the way they distribute movies. The big shift is the desire to allow films to be seen online at the same time they are available in theaters. AMC is in a public spat with NBCUniversal over this exact issue and has stated it won't show that company's films. That further reduces the new content it has to draw customers back into its theaters.
Now what
Conservative long-term investors should probably sit on the sidelines here until there's far more clarity on what the future holds. That includes broader efforts to deal with COVID-19, state-specific reopening plans and progress, AMC's direct reopening plans, and the way in which movie creators choose to react. It's a very complex situation, and heightened volatility is highly likely for the foreseeable future.
