AMC Entertainment's (AMC +7.41%) stock has caught the attention of Reddit group WallStreetBets this year. Starting 2021 at around $2, the price jumped to over $20 by the end of January. At the present level, it is still about six times where it began the year.
Despite the day traders' enthusiasm, there are good reasons you should not buy into the hype. Let's explore them.
Image source: Getty Images.
More movie-watching options
Thankfully, COVID-19 vaccines are now being rolled out, which will hopefully bring back a sense of normalcy to the world. As case numbers go down, governments are permitting movie theaters to reopen. This includes New York City, where officials have allowed them to operate at 25% capacity.
But I'm skeptical about how much this will help AMC's results. Certainly, 2020 was a tough year due to the pandemic. Revenue fell by more than 77% to $1.2 billion and AMC's loss widened to $4.6 billion from $149.1 million.
However, the virus did accelerate underlying trends that have hurt the industry for some time. In 2019, prior to the pandemic affecting the movie industry, AMC's revenue was $5.5 billion, flat compared to the year-ago period. However, with faltering attendance, its admission revenue fell by 2.5% to $3.3 billion.
While this year will undoubtedly bring more people into the theaters, causing revenue to rebound somewhat, AMC still faces major long-term challenges. That's because more movie makers are releasing films even quicker on streaming and premium on-demand services. These companies had already been shortening the time between the theatrical release and when people could watch a movie at home.
AT&T's Warner Brothers division has announced it will simultaneously release all of its scheduled 2021 movies in theaters and on its HBO Max streaming services. Walt Disney is mixing theatrical releases with putting movies directly on its Disney+ service, albeit with an extra fee to watch films early.
In any case, the window between when a movie appears in theaters exclusively and when it becomes available on streaming and other home-based services is shrinking. This provides more options for people to watch, which is great for consumers. However, it does make it more difficult for movie theater companies like AMC to get movie watchers in the door.
A lot of debt
Management has proven skillful at adverting bankruptcy, escaping several times last year. Most recently, AMC raised $917 million by issuing debt and equity in January, a step that CEO Adam Aron says removes talk of an imminent bankruptcy filing "off the table."
However, I wouldn't get too excited given the heavy debt load. At year end, AMC's debt was $5.8 billion, up nearly $1 billion from 2019. It had $308.3 million of cash at the end of 2020. Meanwhile, its operating cash flow was -$1.1 billion.
Not a good combination
If you are considering making an investment in AMC's stock, I'd advise you to reconsider. With competing ways to watch new movies sooner and a lot of debt, the combination will likely leave you with buyer's remorse.
