AMC Entertainment (AMC +2.36%) stock has been in the headlines for a few months already as it has become the darling of the Reddit subgroup WallStreetBets, the group that became famous for the GameStop (GME +1.35%) short squeeze in January. Retail investors have jacked up the price, either because they love the company, or to bring further collapse to over-shorted hedge funds.
If you haven't really followed the drama or want to understand what's going on, here you go.
Knocked down and struggling
AMC is the largest movie theater operator in the world, with over 1,000 theaters worldwide, including the top four out of five highest-grossing theaters. It was crushed during the pandemic with theaters closures, losing almost total sales at certain times. It stayed afloat through debt and stock offerings, and when it could, developed creative solutions such as private theater rentals.
Image source: Getty Images.
The bull argument here is that theater-going is resuming, and AMC can capture the bulk of sales as its theaters reopen. As the leading theater company, and with a strong vaccine rollout, AMC has that opportunity. It's ahead of the competition in terms of the numbers; the second-largest theater count goes to Cineworld (CNNW.F +0.00%), with nearly 800, most of which are in the U.S., and Cinemark Holdings (CNK +1.40%) has just over half of AMC's total theater count.It also gained market share over the past year, since smaller outfits had to close their doors for good, and others don't have the same cash power to properly prepare their theaters for openings.
Signs are that a healthy recovery is under way. People want to get back to the big screen, and high-margin concession offerings are selling well, adding to the sales numbers.
But here are the problems. It may take a long time for theater sales to completely recover, and it may not ever happen. As of May 6, a little more than two-thirds of theaters were open at between 15% and 60% capacity. It's still up in the air as to when that will change.
Streaming stole the show while people were at home, and so far, people are keeping their streaming subscriptions. That's a huge headache for theater operators, who face studios simultaneously going straight to streaming even as they release films in theaters.
AMC has also taken on huge debts to stay afloat. As of the first-quarter report, it had raised almost $3 billion in debt and equity since the pandemic closed theaters, and $4 billion total in efforts to keep going. Revenue was still 84% lower year over year in Q1. That should improve in Q2 from the year ago quarter, although it will still be weak compared to 2019 numbers, even with more seats being filled.
Image source: Getty Images.
A cat-and-mouse game divorced from fundamentals
Fans will point to their love of the movies and excellent prospects for a full recovery when theaters are open.
But at least part of the recent price run-up has nothing to do with the company's overall business.
Retail investors began to hyper-buy AMC stock in January, when it looked like another short-squeeze candidate after the GameStop event. But AMC's share price skyrocketed over 470% over the past one month. Teams of retail investors are getting more and more people on board to keep the stock price soaring and force a short squeeze. Institutional investors who have large short positions in the stock, or have "sold" someone else's stock to buy it back at a lower price and pocket the difference, will need to cash out their positions to cover the margins at which they borrowed the stock. When they sell, it sends the price up even higher. At that point retail investors can sell and make a ton of money; but the investors who don't manage to sell at the high will be left with losses.
Everyone is talking about AMC because of current market dynamics, but in a standard stock analysis, everyone would agree that it's a risky play. If you're looking for a great stock with years of long-term growth ahead, look elsewhere.
