When the curtain closes on 2021 in just under eight months, I have little question that this year will be anointed the "Year of the Retail Investor."
Whether it's been cryptocurrencies or stocks with high levels of short interest, retail investors on social media platforms such as Reddit and Twitter have made their presence known and rocked the boat in a way that Wall Street has never before seen.
The most prominent way retail investors have exerted their influence in the market is by banding together to buy shares and out-of-the-money call options in companies with high short interest -- i.e., companies where a large percentage of shares are borrowed and held by pessimists who want to see the price of a stock decline. Given the right set of circumstances, high short interest can lead to a short squeeze, effectively sending a stock "to the moon."
Retail investors are swooning over AMC
Although video game and accessories retailer GameStop was the first heavily short-sold stock targeted by the Reddit community, it's movie theater chain AMC Entertainment (AMC 0.23%) that might have the most passionate following.
Check any social media message board or chatroom on AMC, and the prominent thesis for holding the stock is the prospect of another short squeeze. For those who may not recall, AMC rose from under $3 to as high as $20 in a couple of days in late January as short-sellers became stuck in their positions. With AMC's total shares held short rising from 55.5 million toward the end of February to 73.8 million at the end of March, the prospect of another squeeze event appears to be brewing. Then again, with the company's daily trading volume so high, the likelihood of a sustainable squeeze, like the one seen in January, is very unlikely.
Retail investors also seem to be optimistic about business getting back to normal. By late March, 99% of AMC's theaters had reopened, and vaccination counts have been rising steadily throughout the United States, which is where most of the company's venues are located. As of April 27, over 37% of the U.S. adult population was fully vaccinated and more than 54% of adults had at least one dose. Further, almost 82% of persons aged 65 and up (i.e., the at-risk group) had at least one dose. Though we remain far from herd immunity, we're moving in the right direction to potentially reduce or remove occupancy restrictions in movie theaters.
The box office has given AMC shareholders some fuel for their fire, as well. As of April 27, Godzilla vs. Kong reached nearly $407 million in worldwide sales, with around $320 million deriving from international markets. Though this isn't going to break any records, it's the unquestioned most-successful film debut since the pandemic began. It may signify consumers' willingness to get back to movie theaters.
AMC capitulates to retail investors, but it may not be a wise move
But all of these potential catalysts are taking a back seat to a gray cloud that's loomed over AMC for nearly two months.
Back in early March, AMC filed a proxy statement with the Securities and Exchange Commission that, among other things, sought to increase the company's authorized share count by up to 500 million shares. If fully executed, this would have taken AMC's fully authorized count above 1.02 billion shares.
However, retail investors have rallied strongly against the CEO Adam Aron and the company's board of directors' idea to potentially issue up to 500 million new shares and effectively double the company's share count. Though issuing shares can be beneficial in raising capital, it also dilutes existing shareholders.
Knowing that retail investors were so vehemently against the idea of authorizing these shares, AMC announced on April 27 that it would drop its proxy vote to increase the authorized share count and, instead, seek to sell 43 million shares of common stock via an at-the-market (ATM) offering. An ATM offering is a fancy way of saying that AMC will sell up to 43 million shares at various periods of time in the coming days, weeks, or months, to raise cash. Based on an $11 share price, AMC could raise around $475 million. These 43 million shares represent the last of AMC's authorized issuances, and will result in modest dilution to existing stakeholders.
While the eventual issuance of 43 million shares probably feels like a big sigh of relief to shareholders who feared increasing the authorized share count by up to 500 million shares, it may ultimately be a poor decision by Aron and his company's board to capitulate to retail investors.
Though bottom-line estimates for AMC vary wildly, which is to be expected given the uncertain nature of the ongoing pandemic, the consensus among Wall Street investment banks is the company will lose money in 2021, 2022, and very likely 2023.
According to Thomson Reuters, AMC is expected to lose an aggregate of $3.94 per share between Jan. 1, 2021, and Dec. 31, 2022. Meanwhile, FactSet pegs AMC's earnings per share at an aggregate loss of $4.98 through 2023. In nominal dollars, before factoring in the ATM offering, we're looking at close to $1.8 billion in losses via the Thomson Reuters model and just shy of $2.3 billion in losses via FactSet. Even if the company raises $500 million via its ATM offering, AMC may not have enough capital to make it through 2022, let alone 2023.
Remember, it's not just that the company's operating model has been raked over the coals by the pandemic. AMC was forced to take on debt during the pandemic that has further hamstrung its balance sheet. Having abundant capital to make it through 2021 doesn't mean the company is out of the woods. The double-digit interest rates on debt securities issued over the past year, coupled with the mountain of debt due in 2026, makes it unlikely that the company will ever generate enough cash flow to dig itself out of the hole it's created.
In my view, AMC will have no choice but to bring additional shares to market well above and beyond 43 million in the future (2022 or 2023) or risk having to restructure its debt through bankruptcy. It wasn't a very profitable operating model before the coronavirus, and its balance sheet will be much worse for the wear following the pandemic. There's good reason I've referred to AMC as one of the most dangerous stocks to own.