Though retail investors have been putting their money to work in the stock market for more than a century, they've shaken the boat in 2021 like never before.
Beginning in January, investors in Reddit's community chatrooms began banding together to buy shares and call options in stocks with very high levels of short interest. These investors aimed to simultaneously effect a short squeeze and punish "the suits" -- i.e., the institutional investors who were predominantly betting against the companies they piled into.
Of all the Reddit and meme stocks retail investors have bought, none has elicited more of an emotional (or should I say cult-like?) following than movie theater chain AMC Entertainment (NYSE:AMC).
Peruse the social media chatrooms, and you'll find one cohesive message: A short squeeze is imminent. AMC message boards are filled with data on short interest, days-to-cover, supposed synthetic shares and dark pools, and so on. But this data all has one thing in common: It tells you absolutely nothing about AMC or how the actual business/industry is doing.
Here are seven facts about AMC that retail investors conveniently seem to ignore or gloss over.
1. U.S. movie ticket sales have been in a 19-year decline
With the vaccination campaign kicking into high gear in developed countries, retail investors are thrilled about the prospect of having moviegoers get back to theaters. They also have the recent success of Godzilla vs. Kong to lean on. But pan out a bit, and you'll see that the movie industry has been in decline for nearly two decades.
According to The-Numbers.com, a website devoted entirely to analyzing domestic movie theater trends since 1995, the number of domestic box office tickets sold has declined from a peak of 1,575,756,527 in 2002 to 1,228,763,382 in 2019, the last full year before the pandemic hit the U.S. market. What's more, inflation-adjusted box office sales have declined from $14.43 billion to $11.26 billion over the same time frame. Both represent drops of 22%.
The data is pretty clear: As new streaming and rental options have expanded, fewer people are heading to the theater. That's not good for AMC or any of its peers.
2. AMC had negative-$324.8 million in free cash flow in the first quarter
AMC CEO Adam Aron made it a point to tout the company's liquidity in its most recent quarterly report. AMC ended with a hair over $1 billion in available liquidity, which marked its highest level in company history. But as I've said previously, there's a big difference between record liquidity and ample liquidity.
As reported in AMC's first-quarter income statement, its free cash flow was negative $324.8 million, which was actually worse than the year-ago period by more than $49 million. Yes, the company raised $428 million with a recent 43 million-share at-the-market offering, but this capital raise only offsets a few months of AMC's absurd cash burn.
Based solely on Wall Street's projected per-share loss estimates over the next seven quarters (i.e., through Dec. 31, 2022), AMC is expected to lose between $1 billion and $1.2 billion, which would eat up most of its remaining liquidity.
3. Its net interest expenses more than doubled in Q1
You'll never see any discussions about debt on AMC message boards, because the company's debt load is damning to the bulls' thesis.
To stave off bankruptcy during the pandemic, AMC was forced to issue stock and sell debt like mad to raise capital. A lot of this freshly issued debt carries interest rates ranging from 10% to 12%, with one tranche of $100 million owed that could go as high as 17% on a variable basis. As a result, AMC spent $151.5 million paying interest in Q1 on its more than $5.4 billion in corporate borrowings. That $151.5 million is more than double the $71.3 million it spent servicing its corporate debt in the year-ago quarter.
If we include all other interest expenses, such as finance lease obligations and exhibitor service agreements with National Cinemedia, AMC spent a total of $162.8 million servicing its debt in Q1. That's $651.2 million on an annual run-rate basis, and it's more cash than the company has ever generated from its operations in a given year.
4. The company's rent costs are headed significantly higher
Retail investors have also been ignoring AMC's very large ticking time bomb: its deferred-rent problem.
During the pandemic, AMC received concessions from property owners to defer its rent. As of March 31, deferred rent obligations for 2021 and beyond totaled $473 million. To cut straight to the point, AMC will need additional concessions from its landlords and for its theaters to return to pre-coronavirus levels to have any shot at making good on these rental obligations. And even then, it still may not be enough. Here's what AMC had to say in its 10Q:
In light of the Company's liquidity challenges, and in order to establish its long-term viability, the Company believes it must continue to reach accommodations with its landlords to abate or defer a substantial portion of the Company's rent obligations, in addition to generating sufficient amounts of liquidity through equity issuances and the other potential financing arrangements discussed below.
While the liquidity the Company has raised has substantially extended its liquidity runway, the new debt the Company has issued or that has been committed, together with the higher interest rate payments that will be required in the future but have largely been deferred, will substantially increase its leverage and future cash requirements. These future cash requirements, like the Company's deferred rent obligations, will present a challenge to its long-term viability if its operating income does not return to pre-COVID levels. Even then, the Company believes it will need to engage in discussions with its creditors to substantially reduce its leverage.
5. It's the exact opposite of cheap if you look at its market cap
The AMC army has also done a good job of glossing over the company's market cap and outstanding share count. They'd like to believe that AMC at $12 a share is an amazing value, especially considering it was going for more than $35 a share on Nov. 17, 2016.
But what retail investors are forgetting is that AMC's share count has ballooned following its numerous dilutive offerings. With a market cap of $5.44 billion, AMC is worth $2 billion more now than it was when the company was profitable and its debt-to-equity was substantially lower in November 2016. In other words, people are paying 58% more now for a company whose operating performance and balance sheet have significantly worsened.
6. CEO Adam Aron's pay doubled as AMC diluted investors
Adam Aron has affably come to be known as the "Silverback" among the apes (retail investors' self-anointed name for their group). But what retail investors overlook is that Aron and AMC's board haven't always had their best interests in mind.
Throughout 2020 and early portions of 2021, AMC had to scale back its capital expenditures to a bare minimum, shutter its theaters, and issue shares and debt in droves just to raise enough capital to keep the lights on. The reward? Shareholders saw their holdings diluted by offerings while CEO Adam Aron's compensation package rose more than 100% to $20.92 million in 2020 from $9.67 million in 2019. Although his salary declined by $150,000 to $1.1 million in 2020, Aron's stock-based compensation more than doubled to $14.8 million. He also took home a $5 million bonus.
Let me repeat this last part: In a year where his company struggled to survive and had to turn to share offerings and debt issuances on numerous occasions, Aron was awarded a $5 million bonus.
7. Hedge funds were net sellers of AMC in Q1
Finally, I thought I'd address commonly touted misinformation regarding institutional and hedge fund ownership in AMC.
You see, AMC retail investors hate institutional investors and hedge funds -- unless they happen to be buying AMC stock. Then, somehow, it validates their point of owning AMC. They've been especially hyped up by data claiming that institutional investors have been buying AMC shares.
A quick look at 13F aggregator WhaleWisdom.com reveals two key findings following the release of first-quarter 13F data last week. First, hedge funds were net sellers of AMC stock. They reduced their holdings in the company from 16.23 million shares in Q4 2020 to 13.66 million shares in Q1 2021.
Second, while total 13F filers (all institutional investors) increased their nominal share stakes in AMC, the percentage of outstanding shares held on March 31 by these firms declined from 27.78% in Q4 2020 to 25.51% in Q1 2021. No matter how you massage the data, the big money remains less-than-enthused with AMC.
There's no sugarcoating my synopsis: I believe AMC is one of the absolute worst stocks investors can buy right now.