Since mid-January, retail investors have made their presence known on Wall Street and collectively rocked the boat in a way never before seen. Dozens of companies have been whipsawed by their influence, with many retail investors focused on finding the next great short squeeze candidate.
But among the stocks retail investors have passionately supported, none may be more polarizing than movie theater chain AMC Entertainment (NYSE:AMC).
Peruse the various AMC message boards, Reddit, and even YouTube, and you'll get one cohesive message from retail investors: AMC is ripe for a short squeeze. These folks are convinced that hedge funds are using underhanded tactics to bet against AMC in an attempt to bankrupt the company.
However, the short squeeze thesis doesn't even come close to telling the full story on AMC. If you're going to put your money to work in this meme stock, it only makes sense to do so if you have a good grasp of all the facts. Here's the full story on AMC that you aren't going to get from retail investors.
Retail investors didn't "save AMC from the hedgies"
To begin with, retail investors believe they're responsible for saving AMC from bankruptcy. This just isn't true.
While shareholders have the right to vote on select company issues via proxy, it's the actions of management and a company that determine whether or not it goes bankrupt. No matter how many shares retail investors buy, they're not going to be able to "save" AMC if the operating model is broken. Conversely, no matter how many shares institutional investors short, they're not going to be able to bankrupt AMC, because operating performance, not shares held or held short, determines whether a company files for bankruptcy.
To add, the vast majority of the shares and debt issued by AMC to raise capital since the pandemic began occurred well before AMC's short squeeze in late January. Retail investors didn't save AMC -- AMC saved itself by issuing a lot of stock and debt.
Short interest isn't a particularly important metric
Retail investors are absolutely obsessed with the idea that AMC will short squeeze and go "to the moon." This means they're laser-focused on metrics like short interest and days-to-cover.
On the other hand, it means they're often completely ignoring the fundamental aspects of the business. Short interest is just one of many metrics to pore over when examining a company. Focusing solely on short interest means you'd be ignoring:
- Sales trends
- Whether the company is profitable or losing money
- Cash and debt levels
Some folks on message boards have suggested these fundamental figures are meaningless. But without these figures, the company doesn't exist. It'd be like buying a car because you fancy its turbo and failing to note that the radiator is cracked, all the hoses are leaking, and the engine is blown.
Neither short interest nor days-to-cover tells you anything important about AMC the business.
The movie theater industry is stagnant
The reality for the movie theater industry is that business is stagnant, and it has been for a while. Since U.S. movie ticket sales peaked in 2002, they've been falling at a steady pace. Even if we remove the pandemic-affected 2020 from the equation, ticket sales declined from 1.58 billion in 2002 to 1.23 billion in 2019. That's a 22% drop-off. Inflation-adjusted box office revenue shows a similar 22% decline between 2002 and 2019 ($14.43 billion to $11.26 billion).
Retail investors will tell you that people are eager to return to movie theaters, and there's no question that some are. But this data is pretty clear that, as a whole, people have been choosing movie theaters less and less over time. There will always be a place for theater operators like AMC, but the dynamics of the industry (e.g., the ability to stream new releases) are changing, and not for the better for movie theater operators.
AMC is pricier now than at any point in its history
The retail thesis also relies on the idea that AMC is "cheap," "undervalued," or some other adjective to describe the company as an intriguing value. But if you were to dig into the company's financials and do the math, you'd see this isn't even remotely the case.
Following the release of its first-quarter operating results on May 6, shares of AMC moved higher to end last week at $9.51 a share. That's a mile away from its intraday high of $35.65 hit on Nov. 17, 2016. But because the company has issued so much stock and converted some of its debt to equity, it ended last week with a market cap of $4.28 billion. On Nov. 17, 2016, its market cap was $3.46 billion. Even though its share price has moved 73% lower, the company's valuation is actually 24% higher!
Consider it in this context: AMC is as pricey as it's ever been as a public company, yet it's losing money hand over fist, looks to be years away from achieving pre-pandemic sales levels, and its debt-to-equity ratio has worsened considerably. That doesn't fit the definition of cheap or undervalued.
Record liquidity doesn't mean ample liquidity
During AMC's conference call, CEO Adam Aron made sure to emphasize that the company had more liquidity at the end of March than at any other time in its history: about $1.01 billion. This figure includes cash and the company's unused revolving credit facilities.
Considering the uncertain nature of the pandemic, record-high liquidity is a good thing. But having $1 billion in liquidity still doesn't mean AMC has enough capital to thrive, let alone survive.
In the first quarter, AMC's free cash flow was negative $324.8 million, with most of this cash burn ($312.9 million) deriving from its operations. This left AMC with $813.1 million in cash and cash equivalents at the end of March. Aron has said that's enough liquidity to get AMC through 2022. But these numbers suggest that may not be the case.
According to Wall Street's estimates, AMC is slated to lose $3.18 per share in 2021 and another $0.84 per share in 2022. Taking into account its worse-than-expected loss of $1.42 in Q1 2021, analysts expect an aggregate loss of between $1 billion and $1.2 billion between April 1, 2021 and Dec. 31, 2022. That's dangerously close to the company's touted liquidity in its conference call.
Bankruptcy is still on the table
Lastly, retail investors aren't going to admit it, but bankruptcy remains on the table. Although near-term bankruptcy is no longer an issue, weaker industry trends and exceptionally high debt levels make it unlikely that AMC will survive beyond 2026 (or perhaps sooner) without either filing for a bankruptcy reorganization or diluting the daylights out of existing shareholders to raise capital.
Between 2013 and 2019, here's a rundown of how much cash AMC generated from its operations:
- 2013: $357.3 million
- 2014: $297.3 million
- 2015: $467.5 million
- 2016: $431.7 million
- 2017: $537.4 million
- 2018: $523.2 million
- 2019: $579 million
Why'd I list these figures? In Q1 2021, the company's interest expenses on its borrowings totaled $162.8 million, which was essentially double from Q1 2020. More importantly, it works out to an annual run-rate of $651.2 in interest expenses ($162.8 million X 4). AMC is on track to pay more to service its debt than it's ever generated in cash from operations in a given year... even its best years. This is why I've referred to AMC as the most dangerous of all the Reddit stocks.
If you still want to buy after seeing all of this information in the hope that AMC gets its short squeeze, I wish you luck. My suggestion would be to avoid this stock like the plague.
And that's the full story on AMC.