To say that AMC Entertainment Holdings (AMC 2.34%) has been a great performer for its investors would be a major understatement. So far in 2021 alone, AMC is up by more than 2,500%. While the fundamentals of the movie theater business have clearly improved, is it enough to justify the current share price? In this Fool Live clip, recorded on June 25, Fool.com contributor Matt Frankel, CFP, and chief growth officer Anand Chokkavelu discuss AMC's performance and what investors should keep in mind before adding the stock to their watch list.
Matt Frankel: But here, let me give you a little statistic. Here are four of the most well-liked companies in The Fool universe. Zillow (Z 3.35%)(ZG 3.39%), MongoDB (MDB 4.24%), Etsy (ETSY 3.91%), and Teladoc (TDOC 3.63%), you guess what those have in common?
Anand Chokkavelu: No.
Frankel: All of them have lower market caps than AMC.
Chokkavelu: Beautiful.
Frankel: All four of those. How crazy is that statistic right there? Zillow. Come on.
Chokkavelu: Right.
Frankel: At least that was as of yesterday. AMC has fallen a little bit and it was close, so Zillow might be a little bigger now, but even so. AMC is trading for about $55 a share as I'm talking. That gives them a market cap of just shy of $28 billion for a movie theater company that was struggling before the pandemic. They are up 2,490% year to date, and that's after a gain late last year when the reopening trade started. They were about $2 a share. The neighbor across the street from me, his son bought a bunch of AMC stock when it was about $2 and now thinks he's the next Warren Buffett.
Chokkavelu: Oh, gosh.
Frankel: I tell them, investing is not always that easy.
Chokkavelu: I have a friend who has some. Well, I'll let you finish, I'll tell you-
Frankel: He bought at $2 because he thought it would be worth maybe $20 a share someday. Not a few weeks later. Another heavy short target, a little over 20% of the float is shorted currently. AMC is not that far off of its peak. Its peak was $72 a share. Its low was about $2 a share. The biggest reason that I gave AMC my 10th ranking instead of 11th is because I would give management about an A rating in how they've handled the short squeeze. They've raised about $2 billion of fresh capital at these generous valuations, we'll call them, and they're using that to look forward to the future. The movie business is going to exist after the pandemic, it just is. Disney (DIS 1.12%) has already come out and said that their big Pixar hits are going to be first in theaters. They're not going to be the simultaneous Disney+ releases you're seeing, because that's where they make the most money, is theatrical releases. Same with Warner, I believe said something very similar. The movie theater business will exist. It was struggling a bit before the pandemic because the market's a little saturated. Right now, there are about 40,000 movie theaters in the U.S. Most experts agree that the market can support about 30,000. Some of the worst performing ones are going to close. But AMC plans to use its fresh capital to acquire the strong performing theaters of some of its rivals that are still struggling who for one reason or another, did not become meme stocks and therefore are not in the financial position to raise billions of dollars. AMC had a market cap of about $500 million at this time last year. Today, AMC could raise $500 million and dilute shareholders by less than 2%.
Chokkavelu: Yes.
Frankel: Their biggest competitive advantage right now is their ability to raise money at these crazy valuations. It's not good for shareholders, but it's good for the company and the movie business in general. They have a lot of debt, is my biggest hang up with AMC. I mentioned they raised about $2 billion of cash. They have $5.4 billion of corporate debt, another about $5 billion of lease liabilities because they rent most of their properties from real estate investment trusts. Speaking of real estate investment trusts, that's the big story with AMC. The real estate investment trust are their landlords. They were so pessimistic. EPR Properties (EPR +1.13%) is one that I follow in particular, ticker symbol EPR. AMC is their biggest tenant. They were so pessimistic about AMC. In the third quarter of last year, they started writing off AMC's rent revenue as uncollectible. Now they're going after them for some of that income. Now, they're saying, "Hey, you can afford it, pay it back." I don't know. I prefer AMC slightly to Nikola just because I think it's not going to go to zero. It's really the big differentiating factor in my book between the two. Anand, do you own any AMC stock? I know you have like 400 stocks, is AMC one of them?
Chokkavelu: Heck no. No. I looked at it earlier. I have a friend who owns just a small amount, and before I knee-jerk, "just take your gains and run," I was like OK, and part of the reason of during this episode is we wanted to see what's real and what's not, firsthand. I took it through the green-light framework that I have, red being bad, green being good. Five categories, four of the five categories were red for me, and the only one that wasn't was yellow and that's just my confidence and my assessment, largely because I haven't followed it that closely or anything. But to your point, as we get to GameStop, I think that's one that actually has finally done a good job of being able to raise some capital. AMC, what worries me is they did a lot of raising in January around when it was like $3 a share. Then more recently, what they were trying to do, which would've been epic, is basically try to double their share count, double from today even more before. They were trying to raise 500 million shares. But they were getting some blowback from shareholders and they scrapped it, which is really defeating for those shareholders. This is what you want. You want them to raise $30 billion of fresh capital and just kind of have it, especially when you have $10 billion of debt and leases so you could be in the clear. Now their new plan that they are trying to get shareholders to approve, is just 25 million shares, which raises at current prices about $1 billion dollars. That doesn't wipe out your debt or your leases. It's one of those where I'm like, could they survive? Yeah, maybe, but before the pandemic, they were trading for less than $1 billion dollars and now they're $30 billion. What's changed since the pandemic started to make them stronger? They don't own Disney+, they're just a movie theater. Maybe they can buy some of those weaker competitors and things like that. But still, you are in the movie theater business, which as good as you can do, it's not a 10-bagger from here I wouldn't think outside of just maybe just some craziness with the WallStreetBets crowd.
Frankel: Don't discount the possibility of that happening.
Chokkavelu: That's why I specifically, "five years from now."
Frankel: That's fair. I think there's a very little chance of it being a 10-bagger five years from now, five weeks from now, it's anyone's guess. But no, I hear you. I think bankruptcy is pretty much off the table at this point, at least in the near future. The $2 billion they've raised has bought them quite a bit of runway but it's still not a stock I want to own.
