The traders of Reddit's Wall Street Bets community shocked the investment world this year by bidding up AMC Entertainment (AMC -0.88%), sending shares higher by nearly 3,000% at one point. However, at Friday's prices, the stock was down more than 40% from its June highs.
Many traders held a "buy first, ask questions later" mentality when opening up a stake. But now, the time for questions has come. Can AMC deliver sustained growth over the long term?
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Upcoming catalysts
The COVID-19 pandemic has created a massive backlog of unreleased films. Production delays have played a role, but studio executives have also postponed releases until theaters reopened to maximize revenue. Over the next year, a number of big franchises will have new installments, including Jurassic Park, Batman, Transformers, John Wick, Avatar, Indiana Jones, Mission Impossible, and Marvel. Keep in mind that AMC is the largest theater chain in the country, with over 60% market share. So there's no doubt there would be an impressive boost to the company's bottom line when these movies hit the theaters (keep in mind that AMC's business wasn't consistently profitable before COVID, so even a blockbuster year may not be a sure thing).
In addition, AMC may have been saved simply by the efforts of Reddit traders to boost the stock. Thanks to a high stock price, AMC raised $1.246 billion in cash via equity offerings in the second quarter alone. That increased its total liquidity to over $2 billion, against $5.5 billion of long-term debt.
If AMC used the cash to pay back debt, then the return on investment would be immediate (we'll have to wait until second-quarter earnings on Aug. 5 to learn more). The average interest rate of AMC's debt exceeds 10%, and interest payments outweighed total revenue in the first quarter. Moreover, Adam Aron, the company's CEO, announced on July 6 that he would scrap a plan to issue 25 million additional shares. Aron does not anticipate any other stock offerings in 2021, which suggests the company believes its turnaround is on track. The company is acting as if it believes it has enough cash to execute its plans for now.
Upcoming inhibitors
A major risk ahead for AMC is the spread of the delta and lambda coronavirus variants in the country. Moviegoers may be inclined to stay at home and watch new releases on streaming services instead, especially when it comes to new releases available to both channels. As a result, don't expect the company's traffic to rebound to pre-pandemic levels anytime soon.
In addition, it's not clear yet how the company could sustain its growth or earnings in the long term. After the movie backlog clears up, AMC would be competing with multiple movie-streaming services and home-entertainment enthusiasts for traffic. But it can't spare much cash for the sake of innovation; the company still needs to generate cash flow to pay off its ballooning debt stack. On top of that, it still owes $400 million in rent to theater landlords due to the lockdowns in the past year.
The missing element
The problem of achieving innovation is a big one in the long run, and AMC is stuck in a catch-22. There isn't anything stopping AMC from launching a paid subscription streaming service for new movies. However, that will inevitably cannibalize revenue from its theaters, leading to a net-zero outcome.
Offering a subscription pass to its theaters wouldn't really work either. MoviePass had already attempted that. To match the value proposition of streaming services, the company had to price its pass at $10 per month, resulting in staggering losses before it went bankrupt.
But the biggest killer of AMC's prospects going forward is probably a combination of 5G and synchronized viewing. For example, the social community platform Discord allows its users to stream movies via its screen-share feature. While the movie plays, users are free to talk with each other, eat their own food, and otherwise enjoy the experience in ways that might be taboo in an actual theatre.
With the rise of 5G, folks can watch movies via screen sharing just about anywhere. Bored while swimming in the lake? Just boot up your phone and watch a movie stream with friends. The best part is that the activity is free; intellectual property laws haven't caught on to the innovation yet, resulting in a grey area. At the end of the day, it would be extremely difficult for AMC to compete with these "mini-virtual theaters" where patrons can watch from anywhere and do whatever they like while watching.
The verdict
Since its inception, AMC has lost a cumulative $5.9 billion, and that number is growing. Investors should note that aside from another near-term spike/short squeeze, there are not many fundamentals backing the company's long-term prospects. In addition, its inability to devote cash to innovation will almost guarantee more revenue and bottom-line woes in the long run. That's on top of its inability to compete with peer-to-peer synchronized movie-viewing experiences. At a forward-looking price-to-sales (P/S) ratio over 8, AMC stock looks incredibly expensive for a company that could yet fall off another cliff in terms of growth. Long-term investors looking for ways to profit from the reopening economy should stay away.
