There's little question that 2021 is going to be remembered as the year of the retail investor. Even though John and Jane Q. Public have been putting their money to work in the stock market for over a century, they've never rocked the boat quite like they have this year.
At the top of the buy list for retail investors is movie theater stock AMC Entertainment (AMC -4.39%). Of the more than 8,000 securities listed on Finviz, AMC is the year's second-best performer, with a gain of close to 1,400%.
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Retail investors go bananas for AMC
Arguably the biggest reason retail investors love AMC is the potential for a short squeeze. A short squeeze describes a very short-term event where short sellers (i.e., pessimists betting on a company's share price to head lower) collectively feel trapped in their positions and run for the exit. Buying to cover their short-sold positions can cause a rising share price to explode higher. It's precisely what happened in late January, when short sellers were expecting AMC to file for bankruptcy protection, but the company raised enough capital via share and debt offerings to take the possibility of near-term bankruptcy off the table.
As of July 15, New York Stock Exchange-reported data showed that 79.75 million shares were held by short sellers.
Retail investors also seem to really like the company and view it as a coronavirus pandemic rebound play. As U.S. and global vaccination rates tick higher, AMC has been able to increase the capacity utilization of its theaters. According to CEO Adam Aron, AMC has seen capacity utilization in the U.S., where it has a majority of its theaters, increase from 41% in the first quarter to 61% in Q2, and to 68% through the first couple of weeks of the current quarter.
AMC could lose a significant portion of its value
Yet, despite this optimistic take by retail investors, I see eight reasons why AMC could head back to its February low, which was $5.26 for those of you keeping score at home.
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1. Ticket sales have been in a nearly two-decade downtrend
To begin with, Americans simply haven't been going to the theater like they once did. The rise of streaming content, including movies, has zapped the lure that movie theaters once brought to the table. According to The-Numbers.com, movie theater tickets sold peaked at 1.576 billion in 2002 and have been trending lower ever since. Even removing the anomaly of 2020 and 2021, total domestic box office tickets sold declined by 22% to 1.227 billion in 2019.
Furthermore, if box office ticket sales are adjusted for inflation, theaters have also endured a 22% decline in revenue between 2002 ($14.43 billion) and 2019 ($11.24 billion). In other words, AMC owns a bigger share of what looks to be a shrinking pie.
2. AMC is effectively tapped on the capital-raising front
One of the biggest concerns for the nation's leading theater operator is that it's exercised almost every available avenue to raise capital. AMC did end June with $1.81 billion in cash and had a record $2.02 billion in available liquidity, including its undrawn revolving credit facility. This means it's well-capitalized for at least the next two years.
However, with the company's outstanding share count rising to north of 513 million, AMC has fewer than 1 million shares that could be issued as of this point to raise additional capital. Without authorization from the company's impassioned retail investors to issue new shares, Aron's hands are tied. That could be a big problem, as you'll see in a number of subsequent points.
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3. The company has burned through nearly $577 million in cash this year
To quote Adam Aron during his company's Q2 conference call:
We are still losing money. We are still burning cash. We're burning less of it, but we're using cash, not generating cash. So, we're not out of the woods yet.
Through the first six months of 2021, AMC's net cash outflow totaled $576.5 million. This is actually $33.9 million more than AMC burned through during the first six months of 2020. Although AMC's cash burn was lower in the second quarter relative to the first quarter, it can't keep going through cash at this pace without having other avenues to raise capital. Based on Wall Street's expectations, AMC is unlikely to turn the corner to recurring profitability until at least 2024.
4. It's staring down $5.5 billion in corporate debt
Taking on a mountain of debt helped AMC expand its reach prior to the pandemic, as well as survive when its theaters were closed during lockdowns. Eventually, this debt will come due; and there's a realistic chance that AMC won't have the money to repay its obligations.
On the bright side, AMC has no debt maturities until 2023, and the bulk of what's due won't need to be repaid until 2026 or 2027. But Aron may be a bit too confident about being able to refinance AMC's debt considering its huge free cash outflows and its net debt, which now stands at $3.7 billion.
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5. AMC's 2026 and 2027 bonds are priced well below par
To build on the previous point, the company's 2026 and 2027 corporate bonds are painting a very worrisome tale about its future.
Usually, bonds are priced at face value (100) or very near face value when they're issued. As of Aug. 10, AMC's $475 million bond, which matures in mid-May 2027, was quoted at 59.99, or roughly 60% of face value. Things aren't much better for a $595 million bond that matures in mid-November 2026. As of Aug. 10, it was quoted at 56.07, or approximately 56% of par value. Less than two months ago, these two bonds had respective face values of 80% (May 2027) and 76% (November 2026). This persistent decline suggests there's very real skepticism from bondholders that AMC won't remain solvent over the long run. Keep in mind that without a large number of shares available to be issued, AMC will have to repay this debt using cash rather than equity.
6. AMC owes a whopping $420 million in deferred rent
Were the company's debt and cash outflow issues not enough cause for concern, it's also in arrears on a significant amount of rent. Temporary concessions tied to the coronavirus pandemic allowed AMC to defer rent on some of its leases. But as with its debt, this deferred rent must be repaid.
CFO Sean Goodman noted on the company's conference call that AMC had $420 million in deferred rental obligations at the end of June. AMC will either need to make good on its deferred rental obligations over the next couple of quarters, or it could offer to use cash to prepay for better lease terms. Either way, AMC's record cash balance is going to dwindle as it contends with its sizable unpaid rent balance.
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7. Film exclusivity has been reduced substantially
One of the highlights of the quarterly conference call was the theatrical exclusivity agreement AMC secured with AT&T's (T 0.41%) Warner Bros. Per Aron, Warner Bros. releases in 2022 will feature a 45-day exclusivity window in its theaters.
While this might sound great on the surface, understand that AMC was regularly securing 75-day to 90-day film exclusivity prior to the pandemic. The Warner Bros. deal effectively halves the period of time AMC will have to feature new films, and it demonstrates the growing importance of streaming content.
8. There's no evidence of nefarious Wall Street activity
Lastly, AMC's retail investors have made numerous claims that Wall Street hedge funds are manipulating their stock. These claims are the sole reason some retail investors bought into AMC in the first place, and are therefore paramount to the success of a future short squeeze.
To date, none of these claims have been proven true. Even Aron debunked the idea of nefarious activity with the following tweet on July 30:
As to the existence of so-called fake or synthetic shares, or the naked short selling of AMC shares, we are unaware of any information validating these theories. Also, we are unable to make any comment on the considerable trading of puts/calls derivatives.
— Adam Aron (@CEOAdam) July 30, 2021
Without evidence of wrongdoing, the momentum behind retail investor sentiment could ebb over time.
Ultimately, we're talking about a company that, even when it was profitable and had a considerably healthier balance sheet than it does now, was never worth more than $3.8 billion. That's a little over $7 a share, taking into account AMC's share-based dilution over the past year. A share price in the low $5 range would sufficiently account for the multitude of issues facing AMC, and the lack of answers as to how the company will overcome them.
