Last year, uncertainties surrounding the coronavirus whipsawed the stock market. In 2021, the pandemic seems to have taken a back seat on Wall Street to a new phenomenon: the Reddit frenzy.
In its simplest form, the Reddit frenzy involves retail investors -- mostly young and/or novice investors -- banding together to buy shares and out-of-the-money call options on heavily short-sold stocks. Short-sellers are investors who make money when stock prices decline. In many instances, institutional investors and hedge funds (i.e., the perceived-to-be "big money") are the biggest short-sellers.
These Reddit traders have purchased stock and used leverage to effect a short squeeze in dozens of companies since mid-January. Since short-selling losses are potentially unlimited, a short squeeze can send pessimists scurrying for the exit at the same time, which can exacerbate a runaway move to the upside in a heavily short-sold stock.
AMC Entertainment is "dramatically overvalued"
Although GameStop is the best-known Reddit play, its popular sidekick would certainly have to be movie theater operator AMC Entertainment (AMC 5.09%). Shares of AMC are higher by 557% on a year-to-date basis, through this past weekend.
But according to one analyst, AMC houses a lot of risk and could be in for a bumpy ride.
Two weeks ago, equity analyst Rich Greenfield, who covers media and technology companies for LightShed Partners, initiated coverage on AMC Entertainment with a sell rating. Although sell ratings are fairly uncommon on Wall Street, it's Greenfield's 12-month price target that really stands out: $0.01. You're reading that correctly: One cent!
Greenfield's thesis as to why AMC will lose nearly 100% of its value over the next year hits on a number of points. To begin with, he believes that AMC is over-levered and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates are too rosy. Greenfield notes that the company is valued at 8 times debt-to-EBITDA, and believes it's unlikely the company will surpass $600 million in adjusted EBITDA in 2022. With little to no free cash flow, he doesn't believe AMC will be able to service its growing debt load.
Furthermore, Greenfield is skeptical about AMC's audience returning anytime soon. He notes that pandemic fears may persist and keep people away from theaters. Greenfield points to increased streaming usage, as well, as reason why the company could struggle. In other words, consumers could opt to stay home to watch select new releases, or the exclusivity window for theater operators could notably shrink.
Could AMC really fall 99.9% over the next year?
The $64,000 question is: Could AMC's stock really become worthless within the next 12 months?
As much as I view bankruptcy as a legitimate possibility for AMC and agree with much of Greenfield's analysis, it's unlikely that AMC reaches this price target within the next 12 months. The reason is simple: AMC has the power to sell common stock and potentially even issue more debt capital to raise money, should the need arise. Greenfield's price target only comes into play if AMC files for a Chapter 11 bankruptcy reorganization, which would likely wipe out retail investors.
However, I wouldn't discount the possibility of $0.01 being a realistic price target within the next two years for a number of reasons.
To start with, AMC recently claimed to have more than $1 billion in cash on hand. This comes after issuing close to 165 million shares and boosting its debt capital by over $400 million. But Wall Street's consensus loss estimate for 2021 and 2022 would result in an aggregate net loss of around $1.75 billion. Put simply, AMC doesn't have enough cash to survive the losses that Wall Street is expecting over the next two years.
It's also unclear when society will return to normal. Even though AMC is planning to have 99% of its theaters open by March 26, the vast majority of these locations will have ongoing restrictions, such as limited capacity. Without a return to normal capacity, AMC could struggle to draw crowds and attach high-margin concessions sales that are its bread and butter.
While there's no doubt an open theater at 50% capacity is better than a closed theater, the pandemic hasn't gone away. New variants have spread to various locales in the U.S., and a sizable percentage of the population in various surveys has shown little or no interest in getting the vaccine. In short, reaching herd immunity could be pushed down the road, which would be devastating for a company like AMC, which is hanging on by a thread.
But possibly the most-damning catalyst for AMC is the rise of streaming that Greenfield alluded to. This year, AT&T subsidiary WarnerMedia is releasing all of its new movies on HBO Max the same day they'll hit theaters. Walt Disney is doing something similar with a handful of movies on its Disney+ streaming service. Either consumers will choose to stay home, or the exclusivity period for movie operators will shorten considerably. The landscape is changing for AMC, and not for the better.
In case you need one more reason to be skeptical of AMC, how about CEO Adam Aron having his compensation package more than double to $20.9 million from $9.6 million in 2020. Aron received a hefty bonus and stock award for his efforts to keep AMC afloat, which essentially amounted to issuing stock and debt like it was going out of the style.
AMC is a fundamental dumpster fire that's being kept afloat by the emotions of retail investors. Whether it's the company's ongoing share-based dilution or its poor operating performance, the arrow is most definitely pointing down.