Robinhood's list of its top 100 stocks is an excellent resource for investors looking for their next big purchase. But some popular companies on the list are money-losing investments that could sink your portfolio. Let's explore the reasons why you should avoid AMC Entertainment (AMC 8.23%) and Lyft (LYFT 3.59%) like the plague.
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AMC Entertainment: COVID-19 is killing the theater industry
AMC Entertainment is a movie theater operator that generates revenue from ticket and refreshment sales at its locations around the globe. The coronavirus pandemic clobbered this industry with lockdowns and changes in consumer behavior. AMC is unlikely to recover from the crisis simply because it's losing money too fast.
The coronavirus pandemic is resurging. According to a September poll from market research company Morning Consult, only 18% of American consumers feel comfortable returning to cinemas, even though most states have opened them. Some European consumers won't even have the option to visit theaters.
England and Germany have reimposed strict lockdown procedures, and other nations may follow as COVID-19 infections soar across the continent.
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AMC is guiding for third-quarter revenue of $119.5 million, which would be a staggering 91% decline from $1.32 billion reported this time last year. The company expects up to $604.4 million in operating costs and expenses during the period, despite reporting cash and equivalents of just $417.9 million on its balance sheet.
Management has expressed substantial doubt about AMC's ability to continue as a going concern because of its depleting cash reserves. This means bankruptcy is a real possibility if theater attendance doesn't recover soon. With record-high COVID-19 infections keeping consumers at home, the outlook is grim. AMC can kick the can down the road by issuing more shares, but this probably won't boost the stock price because the new cash will go to paying expenses instead of creating value.
Lyft: Trapped in a price war with Uber
Lyft and its rival Uber Technologies were among the first companies to capitalize on the surging popularity of ridesharing -- an industry projected to grow at a compound annual growth rate of 19.2% until 2025 (although the pandemic could hurt this outlook). But despite offering a useful service to consumers, Lyft may struggle to create value for investors because of its weak competitive moat and tiny margins.
Lyft's revenue declined by 61% to $339.3 million in the second quarter as consumers avoided ridesharing and other forms of potentially high-risk transportation during the pandemic. Weakness is likely to continue in the third-quarter report (expected on Nov. 10) because of the surging number of coronavirus infections around the world, though management hasn't provided any guidance on near-term expectations because of the fluidity of the situation..
At the same time, Lyft will still struggle when (or if) ridesharing demand picks up because of competition from its poorly differentiated rival Uber.
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Ridesharing has low barriers to entry and low switching costs for drivers or passengers, making it extremely price-sensitive and competitive. Uber can easily undercut Lyft's price, and vice versa, and both companies could easily get trapped in a price war. Uber lost $8.5 billion in 2019 while Lyft lost $2.6 billion in the same period -- a 186% increase from the previous year. The company struggles because of its huge cost of revenue -- which totaled 74% of sales in the second quarter. This outflow is mainly related to insurance costs and personnel-related compensation.
Despite facing an uphill battle, CEO and founder Logan Green claims that Lyft can attain profitability on the basis of adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) by the fourth quarter of 2021. Investors should take Green's projection with a grain of salt because Lyft's adjusted EBITDA adds back stock-based compensation expense, which has historically been a significant outflow for the company. Stock-based compensation totaled $1.6 billion in full-year 2019 and $266 million so far in 2020 -- it is an insidious risk for investors because it reduces their claim on future earnings.
These stocks could sink your portfolio
AMC Entertainment and Lyft face significant near-term challenges from the resurging coronavirus pandemic, as well as long-term, company-specific challenges in their respective industries. AMC is the riskier bet because it could go bankrupt amid the second wave of coronavirus. Lyft is in a stronger position because it may eventually turn itself around if management cuts back on stock-based compensation and manages to differentiate itself from Uber -- although it has shown no signs of pulling this off so far.
