Now that the trading frenzy surrounding AMC Entertainment (AMC -0.85%) has finally subsided, investors can make a more sober assessment of whether the movie theater operator is a good stock to buy.
The 800% rally earlier this year was not driven by any fundamental analysis of its business but rather a momentum-driven chain of events that quickly flamed out. Although AMC stock is still up over 150% year to date, let's see if the events of the past several weeks have changed its precarious position for the better.
The streaming video threat
Movie theaters are facing a crisis. While many locations have reopened after shutting down for months due to the pandemic, consumers are still hesitant to go to the movies, and there are few new releases to draw more people into theaters. And even when patrons are showing up, reduced-capacity requirements are limiting theater operators' ability to generate revenue.
With fewer moviegoers in the seats, concession sales (the main profit driver for these companies) are also constrained.
The hope is that as the year progresses, more films will be released to the big screen, including a number of major blockbusters. But after an incredible year of growth for streaming entertainment, media giants also want to juice the subscriber numbers for their new streaming video services. As a result, day-and-date releases are becoming much more common as movies debut in theaters the same day they become available to streaming subscribers.
AT&T's Warner Bros. studios is taking this approach in 2021, releasing all of its films to theaters the same day it makes them available on HBO Max. And Walt Disney has indicated it's reserving many of its new productions exclusively for Disney+.
That will only worsen the prospects for struggling theaters, but it's the environment that operators like AMC, Cinemark, and Cineworld are grappling with today.
Cash infusions blunted the immediate danger
Despite these difficulties, AMC Entertainment has managed to survive the worst months of the pandemic and is no longer at risk of filing for bankruptcy, at least for the time being. The company had previously warned it could not survive the current year if it didn't raise about $750 million.
In the midst of the fervor over GameStop and other short-squeeze candidates, AMC was able to raise nearly $1 billion through new equity and debt offerings, over half of which came from issuing 165 million new shares. The rest came from new debt commitments. Where GameStop was the public face of the so-called investor revolt, it never pulled the trigger on selling more stock when its shares were soaring. AMC actually cashed in, though it still made what could be considered a $900 million mistake.
AMC says the cash infusion means its financial runway has been extended deep into 2021, and the possibility of bankruptcy is no longer an issue.
Still a dicey situation
But that doesn't make AMC stock a buy. One analyst thinks the stock is only worth about $1 per share, or less than a fifth of where it's trading as of this writing.
Also, the theater chain's predictions for survival rely not only on movies returning to the big screen but also on a widespread rollout of COVID-19 vaccines. With new variants of the virus popping up all over the globe, there could be more roadblocks ahead.
The triple-digit rally last month bought the theater chain some time, but with streaming services a new competitive wild card for theaters and uncertainty around a proper end to the pandemic, now is not the time to buy AMC stock.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.