The coronavirus pandemic has changed the entertainment industry forever, and some companies may not recover. Shares of movie theater operator AMC Entertainment (AMC -7.25%) have fallen 52% this year, and further declines are likely as it struggles with low attendance and massive cash burn. Let's explore the reasons why investors should sell AMC stock before it's too late.
Studios are moving to on-demand streaming
As of the end of September, AMC had reopened approximately 78% of its U.S. locations, despite ongoing restrictions in New York and California. But visitor traffic remains subdued, hovering between 10% and 20% of last year's levels, according to CFO Sean Goodman.
Customers are scared of catching COVID-19 at theaters. Moreover, they face a dearth of quality movies, as studios delay releases and move content to subscription video-on-demand (SVOD) services.
In October, Walt Disney announced plans to restructure its media and entertainment divisions to focus on direct-to-consumer streaming, which contributed nearly a third of its revenue last quarter. The studio reportedly plans to debut more of its high-profile live-action films on Disney+ instead of in theaters.
Warner Bros. is also chipping away at the industry. It plans to launch all of its 2021 movies on its HBO Max streaming platform on the same day they are available in theaters. This move will affect much-anticipated titles like Wonder Woman: 1984, The Matrix 4, and The Suicide Squad.
The trend toward video-on-demand could continue even after the pandemic subsides, because studio owners aim to build up viable SVOD services that can generate recurring revenue and substantial profits in the future.
The vaccine: Too little, too late for AMC?
Many people see the development of a COVID-19 vaccine as a positive catalyst for the movie theater industry. But mass vaccination -- which the Trump administration says could come by June 2021 -- may not arrive in time to save AMC Entertainment. The company faces significant cash burn and dwindling liquidity.
Third-quarter revenue fell 91% to $120 million, leading to a net loss of $906 million in the period. Cash burn totaled a more modest $324 million when adjusting for financing and investing activities such as capital raises and asset sale proceeds. However, AMC ended the third quarter with cash of just $418 million on its balance sheet, so it is rapidly running out of runway to sustain its operations.
Management believes AMC has enough liquidity to last through the beginning of 2021 in a worst-case scenario. The company is also trying to extend its runway by deferring rents and filing to sell $864 million worth of shares in December. These moves may help stave off bankruptcy, but they won't necessarily boost AMC's stock price. The capital raise will dilute existing shareholders and will be used to pay expenses and not for value-creating investments.
Investors should avoid AMC
Even if AMC survives until the majority of America's population gets vaccinated, the business still faces severe challenges.
As mentioned earlier, studios may ditch theaters in favor of building up their SVOD platforms. Meanwhile, AMC will be left with a debt-filled balance sheet and interest expense that will pressure earnings long after the crisis is over. The company will also have to pay back deferred rent to its landlords, which could increase future cash outflows for the company. This could make its stock price underperform.