What happened
Shares of movie theater operator AMC Entertainment (AMC -3.25%) fell a little over 11% in the first two hours of trading on Nov. 10. That drop followed a big rally the day before on positive COVID-19 vaccine news. The two are connected, but you have to do a little second-order thinking to suss out what's going on.
So what
On Nov. 9 Pfizer and partner BioNTech announced very successful results from their COVID-19 vaccine tests. That news put investors into what can only be described as a jubilant mood. Many of the stocks that had been most affected by the pandemic rallied, including AMC's. Indeed, the company had to suffer through widespread theater shut downs early in the effort to slow the spread of the coronavirus. Even after AMC's locations started to reopen for business, it had to deal with occupancy constraints, increased cleaning costs, delayed or even canceled movie releases, and a public that has been generally reluctant to be in group settings. It's been ugly. A vaccine, however, could help to turn all of those issues around. But that was yesterday, or at least yesterday morning.
Image source: Getty Images.
As the day wore on, Wall Street started to rethink the near-term and long-term implications of a vaccine. AMC's stock, which was up 80% or more at one point in early trading on Nov. 9, actually ended the day with "just" a 50% or so gain. And today the stock sold off at the open. That might have been investors taking profits after a big rally. However, when you think about the steps that still need to occur on the vaccine front, it could also be a very realistic rethink of the situation.
For example, Pfizer and BioNTech still need to get their vaccine approved. Then it needs to be produced and distributed, which will take time. And it could be months or years before the vaccine is implemented widely enough to have a material beneficial impact on the country. In the meantime, COVID-19 cases are rising again with targeted economic closures being used to fight the current resurgence. So AMC will likely be dealing with material headwinds for a period of time that could last months or longer. The company's situation is complicated by the fact that it is carrying a material debt load (financial debt-to-equity is 10.5 times) and has already warned that it is short on cash.
Now what
In a best-case scenario, there's a huge amount of recovery potential at AMC even from current levels. But that assumes a lot of things go right and do so relatively quickly. Sure, the positive vaccine update is good, but most conservative long-term investors probably won't want to take the risk that AMC's recovery stalls because the future doesn't unfold as quickly or as perfectly as needed.
