AMC Entertainment Holdings (AMC 3.67%) may be an even bigger star these days than those gracing the screens in its theaters. At least with investors. A group of Reddit investors pushed AMC into the spotlight earlier this year when they started a movement to buy the stock. As a result, the shares soared more than 2,500% in the first half.
Those holding short positions in AMC weren't (and still aren't) happy. A massive gain means they lose their bet. For AMC and its shareholders, however, the Reddit trend has equaled survival. Support from retail investors allowed AMC to issue new shares and raise much-needed cash. But the AMC story isn't over. In fact, the company added a new chapter in recent days with a decision that pleased many of its shareholders...
Image source: Getty Images.
Before and during the pandemic
First, a little background. The coronavirus pandemic definitely hurt AMC. But things weren't exactly easy for the world's biggest movie theater chain prior to the crisis either. In 2019, U.S. and Canada box office revenue fell 4%, according to the Motion Picture Association. And the number of tickets sold slipped 5%. At the same time, the U.S. home/mobile entertainment market climbed 8%. As for AMC, it's reported annual losses in two of the three years prior to the pandemic.
When theaters around the world temporarily closed during the worst of the health crisis, AMC's revenue plunged. It sank 77% for the full year 2020 to $1.2 billion. And AMC reported a net loss of nearly $4.6 billion. That's compared to a loss of $149 million in 2019. The company burned through cash at a rate of more than $100 million per month during most of the year -- and faced deferred rent payments. At the same time, AMC's share price fell more than 70% last year.
What's changed since? With theaters open, the company has an opportunity to actually generate revenue there. And the climbing share price offered AMC a solid opportunity to raise money. The company raised $1.2 billion in the second quarter by issuing new shares. That's on top of more than $1 billion raised through share sales last year and in the first quarter of this year.
Those were wise decisions. But in my opinion, AMC stumbled with its most recent move. The company decided not to issue more shares. It originally planned to ask shareholders for approval to sell 25 million new shares. Then AMC dropped the idea to please investors who dreaded more share dilution. But the number of shares to potentially be sold only represented about 5% of the company's outstanding shares. So, dilution would be limited. Yet it would have represented a real positive from a financial point of view. At recent prices, such a sale could bring in about $1.2 billion.
What hasn't changed
And AMC really could use that money. Why? Because there's a lot more that hasn't changed for the theater operator. In the first quarter, AMC burned through cash at a rate of $120 million per month. The company reported deferred rent payments of $470 million as of the end of the quarter. That's up by $20 million from the end of the previous quarter. And AMC's corporate borrowings well surpass its cash level: $5.45 billion versus $813 million as of March 31. All of this against the backdrop of a challenging movie market -- even without the pandemic in the picture.
What does this mean for investors? AMC is a highly risky stock that I would avoid at all costs right now. Reddit investors sent the shares into the stratosphere. But these gains haven't been based on fundamentals. The combination of the pandemic and a weakening market in non-pandemic days means recovery for AMC is going to be tough. It's likely everyone will continue talking about this entertainment stock -- as long as its strongest supporters help it maintain these levels. But if they decide to step back, AMC stock could be heading for a dramatic decline.
