AMC Entertainment Holdings (AMC -7.25%) struggled to stay afloat in the depths of COVID-19. Its stock price -- however -- tells an entirely different story. In just the last 12 months, AMC's common equity delivered 450% returns for shareholders.
With the company's fundamentals severely worsening during the same period, this bullish run seems to be fueled more by a short squeeze than any conviction behind the business. While trading profits can be extremely tempting, investors should stay far away from this volatile stock. Here's why.
The pandemic forced AMC to close most of its venues. To survive, the theater chain had to turn to capital markets to fundraise and dilute its way through the pain -- it did just that.
The company now has just over 500 million shares outstanding versus about 100 million just 12 months ago. Even with all of this dilution and fundraising, total long-term debt stands at a hefty $5.46 billion dollars and has barely moved lower with the equity raises. Additionally, its debt issuance last July came with a sky-high interest rate of 10.5%, depicting the severe risk creditors see in AMC's business longevity. Why don't equity investors see the same thing?
Despite all of this, its enterprise value sits at $29.5 billion, meaning it trades for over 12 times sales. Double-digit multiples are generally reserved for high-growth, high-margin companies -- AMC is not one of them.
The company remains deeply mired in cash-burn mode, and even in normal times, it could not consistently post positive net income. The combination of an exploding share count, a considerable debt load, and still a very long road to recovery is concerning to say the least.
Even the company seems aware of this. The management team included several blurbs in the most recent stock offering essentially warning potential investors the equity could be worth nothing in the future. Institutions and insiders seem to be taking that advice.
Mudrick Capital was involved in purchasing 8.5 million AMC shares in a secondary offering and then flipped the entire stake immediately for profits. Insiders have been off-loading shares recently, and while insider selling is not the end of the world, the large size of these sales has been notable.
No intellectual property, yes problem
The structural issue with AMC's business model is the virtual absence of intellectual property (IP) the company owns. It does not create its own films but merely offers a venue to watch them before those films are released more broadly to television, streaming services, and more.
Content creators are no longer prioritizing this relationship as they did in the past. For example, this year, AT&T's HBO Max co-released films to theaters as well as its streaming services at the same time.
Furthermore, ViacomCBS has already announced a permanent shortening of the exclusive theatrical window. The company is focusing more intensely on building out its streaming services, and this is one of the ways it is doing so. Even streaming-native giants like Netflix are releasing a film a week this year in its drive for more eyeballs.
There will always be passionate movie-goers who prefer the big screen experience at the theater. Still, AMC depends on creators allowing exclusive showings, and as we can see, that is less certain by the day.
AMC comes with a plethora of issues making the investment quite unattractive. I think investors of all strategies should steer clear of this name and seek out profits elsewhere. AMC still has a long road to recovery, and that road does not seem certain or lucrative.