When the curtain closes on 2021, it'll undoubtedly go down as the "Year of the Retail Investor." Though retail investors began piling into the stock market during last year's wild volatility, they made their presence known in a big way by rocking the boat in January and February via short squeezes.
Without getting too far into the weeds, retail investors on Reddit and other popular social media chatrooms began banding together in January to buy shares and out-of-the-money call options in stocks with very high levels of short interest. In certain instances, where average daily volume was low, relative to what it is now, these retail groups were able to effect a short squeeze -- an event where short-sellers feel "trapped" by a rapidly rising share price and scurry for the exit. Since short-sellers need to buy shares to cover their positions, it only accelerates the move higher in a rapidly rising stock.
Although video game and accessories retailer GameStop started this short-squeeze craze, it's movie theater chain AMC Entertainment (NYSE:AMC) that's grown into the crown jewel of the retail movement.
Retail investors swoon over AMC
The answer to "Why AMC?" among retail investors usually boils down to three things.
First, they're collectively convinced that another major short squeeze is imminent. Although shares held short has risen over the previous three months, the recipe for a sustained short squeeze isn't there. Short interest stands at a high but not eye-popping 21%, and the 87.5 million shares held short at the end of April equate to a days-to-cover (also known as short ratio) of just below 1. This implies pessimists could cover their positions in a day, which means there's no feeling of panic among short-sellers. Nevertheless, retail investors swear by these short-squeeze metrics.
Second, they're encouraged by the reopening of the U.S. and global economy. The recently updated masking guidelines from the U.S. Centers for Disease Control and Prevention, coupled with the fact that 59.4% of the population aged 18 and up has had at least one dose of coronavirus vaccine, suggests that AMC may be able to boost theater capacity sooner rather than later.
And third, retail investors are enthralled by the performance of Godzilla vs. Kong, which raked in $422.2 million in gross worldwide revenue, including $93.6 million in the United States. It's been, without question, the most successful theatrical release since the pandemic began.
Can AMC survive over the long run?
Yet if you pan around Wall Street, you'll find a relatively cohesive message: Analysts aren't impressed. With the exception of B. Riley, which raised its price target on AMC to $16 this past week, the remainder of Wall Street has a consensus one-year target on AMC of around $4. For context, it closed last week just pennies from $13.
Even though AMC retail investors loathe Wall Street (unless those analysts or institutions happen to be bullish on AMC), this low consensus price target raises a fair question: Will AMC survive?
A broader look at movie theater trends bears uncomfortable news: Things are stagnant. Even if we toss 2020 out of the equation, box office ticket sales have declined from a peak of 1.576 billion tickets sold in 2002 to 1.229 billion tickets sold in 2019, according to data from the-numbers.com. On an inflation-adjusted basis, the theater industry brought in $14.4 billion in today's dollars in 2002 and just $11.3 billion in 2019. AMC may now have a larger share of the U.S. market following theater bankruptcies, but it's a larger share of a shrinking pie.
What's more, streaming is set to be a serious thorn in the side of the movie theater industry. This past week, Walt Disney (NYSE:DIS) announced that two upcoming films, Shang-Chi and Free Guy, will open exclusively in theaters but will only have a 45-day window of exclusivity before transitioning to streaming and video-on-demand, as opposed to 90 days. Meanwhile, most of Disney's other films, including Black Widow, will debut concurrently on streaming platform Disney+, or bypass theaters entirely. Once again, AMC's larger market share is meaningless if exclusivity is reduced.
AMC has two paths forward, and they're both bad news
But things look a whole lot worse when you back away from looking at the shrinking movie theater industry and focus solely on AMC's operating performance and its balance sheet.
I get asked a lot why I pick on AMC so much more than the other meme stocks, such as GameStop, Sundial Growers, and Zomedica. The answer is simple: These companies have sizable net-cash positions. I might greatly dislike their valuations and their poor operating performance, but they're in no danger of going belly-up anytime soon, if ever. That's not the case for AMC, which ended March with $813 million in cash and $5.46 billion in corporate borrowings. If we include the $428 million raised from the 43 million shares sold at-the-market over the previous two weeks, AMC has well over four times more debt than cash on hand.
Here are a few things to think about:
- In 2019, AMC generated more cash from its operations than ever before ($579 million). However, even with this record cash production, the company still wouldn't be able to cover the annual run rate of $651 million it's on track to pay in interest expenses in 2021. AMC couldn't generate enough cash from its business before the pandemic to service its existing debt, so how is it going to do so now, while also reducing its debt load?
- A significant portion of AMC's debt -- especially that due in 2026 -- is non-convertible. This is a fancy way of saying that the company will be required to repay debtholders with cash, not common stock. There's virtually no chance the company will have the capital needed to pay off its debt, and no bank in their right mind is going to lend to AMC without a double-digit interest rate, if at all.
- The company had a free cash outflow of $324.8 million just in the first three months of 2021. That's actually $49 million worse than the year-ago period. If Wall Street's net loss estimates prove accurate, AMC is on track to lose between $1 billion and $1.2 billion over the next seven quarters (i.e., through the end of 2022). This is going to eat up most of AMC's remaining liquidity.
The way I see it, AMC has two paths forward. It can either dilute the daylights out of its faithful retail investors to raise the capital necessary to deal with its debt, or it'll be forced to declare bankruptcy with the hope of reorganizing under Chapter 11 bankruptcy protection. AMC isn't in danger of going bankrupt in 2021 or 2022, according to CEO Adam Aron, but the numbers begin getting really ugly in 2023 and beyond, especially with the company now out of common stock to issue.
If you're in AMC solely for a short squeeze and know nothing about the company's actual operating performance or balance sheet, you'd better hope you get your answer one way or another soon. In my view, AMC will be bankrupt by 2026, or sooner, if nothing changes.