Shares of AMC Entertainment Holdings (AMC 5.45%) have been on a wild ride recently, as the theater chain's stock is caught up in the buying frenzy induced by online discussions on a Reddit forum. Despite this, the fundamental outlook for the company hasn't changed all that much in the past few weeks -- and certainly not enough to justify the frenzied buying.
The substantial increase in the stock price in recent days has allowed management the option to offer more shares to the public and raise much-needed capital. That financial lifeline will be crucial for AMC, which is burning through available cash at a pace of $130 million per month as it continues to manage the operational difficulties created by the coronavirus pandemic. AMC recently raised nearly $1 billion in additional debt issuance, which gave CEO Adam Aron enough confidence to say that bankruptcy is not an imminent threat any longer.
However, just because bankruptcy is not on the horizon at the moment doesn't mean that AMC now on its way to again producing its pre-pandemic revenue and profit levels. The company still faces issues a resolution of the pandemic is unlikely to solve.
Here are two specific reasons why AMC is going to have a hard time bouncing back.
1. People have upgraded their home-entertainment systems
Some people like to watch a movie at an AMC theatre instead of at home because of the vast difference in the quality of the viewing experience. AMC theaters have massive wide screens with the latest and loudest surround-sound audio technology that makes your comfortable reclining theater seat rumble.
However, as people were forced to hunker down at home to avoid being exposed to the coronavirus, some upgraded their home-entertainment systems. Indeed, sales of TVs in the U.S. increased by 20% year over year in 2020.
Some regular movie goers also noticed the difference in cost and convenience between theaters and home viewing was becoming significant. Movie ticket pricess, parking fees, child-care costs, concession costs, travel to the theater, and the occasional irritations in the theater with fellow viewers all contribute to make watching a movie at home more acceptable. If you have the latest big-screen TV with a high-quality sound bar, the difference between your home setup and that of the theatre just narrowed. For some, that is enough to keep them at home.
2. Studios are skipping theatrical releases and going straight to streaming
During the scramble that ensued at the onset of the pandemic, studios with movies slated to be released either delayed them or instead released them straight to streaming. Comcast's Universal Studios, for instance, put its film Trolls 2 on demand for rental simultaneous to its release in theaters (which were mostly closed and couldn't show it) last April. In September, Disney released its film Mulan straight to its Disney+ streaming service for a premium fee in the U.S. and offered its most recent Pixar production Soul for free to members of Disney+ in December. The results of these experiments appear to have been positive, because other media companies have jumped on board with similar release strategies. AT&T's Warner Media said that all its 2021 movies would be released simultaneously in theaters and for a limited time on its streaming service HBO Max.
These changes could spell big trouble for AMC, which makes much of its revenue from short-term exclusive access to new releases that attract movie enthusiasts to its theaters. Indeed, AMC's share price fell after Warner Media's announcement, and the company's fighting to regain the initial exclusivity window before movies are released to other platforms.
What this could mean for investors
Overall, AMC will have a difficult time bouncing back from the devastating consequences of the pandemic. People have gotten accustomed to entertaining themselves at home, and media companies have made adjustments to deliver entertainment to their living rooms. Add to those negatives the fact that the rollout for coronavirus vaccines has been slower than anticipated.
New variants of the COVID-19 disease are emerging, and the reality may be that the difficult economic effects of the pandemic last well into 2022. Investors who were hoping for a quick recovery for AMC's revenue and profits might be disappointed in the way things are turning out.