On Monday, the S&P 500 suffered its biggest one-day plunge since May as the downdraft sent most stocks tumbling lower. Interestingly, battleground stock AMC Entertainment (AMC 0.38%) performed much worse than the market by dropping 9% when the broader market was down just 2%.  This is because the theater operator's stock price has been inflated far beyond a fair representation of its business fundamentals.

This past Labor Day, AMC achieved important milestones with attendance exceeding pre-pandemic levels and admissions revenue breaking the U.S. record it set in 2013. Despite the market sell-off and the theater operator's outsized plunge, is AMC Entertainment's stock safe over the long-term? Let's find out.

Moviegoers cringing in theater

Image source: Getty images.

Holding firm in the face of adversity?

AMC has become the poster child for the meme stock craze that began in 2021. Even though its stock is down 45% from its all-time high set this spring, shares are still 1,700% higher today than Jan. 1.

AMC Chart

AMC data by YCharts

Although Wall Street holds the theater chain's shares in low regard, the meme investors, are committed to hold on for dear life. 

Still, AMC has lost more than a fifth of its value over the past week, as fears of a downturn loom large. If China's largest, most indebted property owner defaults on its debt payments, domino effects could be felt worldwide. Movement towards recession is the last thing the theater operator needs right now.

Needing every advantage it can find

While AMC had a big holiday showing, there are a few caveats. First, ticket prices are more than 12% higher on average in 2021 than they were in 2013, according to the National Association of Theater Owners.

Meanwhile, attendance remains in decline. Prior to the pandemic, attendance had fallen from 1.34 billion admissions in 2013 to 1.24 billion in 2019, a 7% decline. While there were a few years in between that saw some spikes, no year reached that 2013 height. 

Attendance is down 20% overall since the high-water mark of 2002, and it will continue declining, possibly at an accelerated rate because of streaming video's prevalence. Even with Disney (DIS 1.00%) agreeing to a 45-day window of exclusivity for theaters for the rest of its 2021 movie lineup, the proliferation of streaming video services will continue to eat away at theater attendance.

Weakened financials undermine resolve

Beyond broad industry trends, AMC has obvious problems of its own. To survive the pandemic it had to take on about $1 billion worth of debt while also issuing tens of millions of shares to raise cash.

It needs to maintain elevated attendance levels, so while the better Labor Day report and Disney's film release schedule helped, whether the level of interest can be sustained is the question.

AMC has large bills coming due on its theater leases, which could cause near-term financial difficulties. The stock dilution it undertook helped it raise a lot of money -- it had $1.8 billion in cash and equivalents at the end of last quarter, significantly more than the $308 million it had at the end of 2020 -- but it will need that money simply for operational purposes.

Down but definitely not out

These are the types of business fundamentals critics of AMC's lofty share price talk about but the meme investors want to ignore. All they're willing to discuss is sticking it to the short-sellers who are trying to capitalize on the trends working against the theater business.

That's not to suggest AMC Entertainment is going to go under, not for many years. The headwinds aren't rapidly deteriorating its position, just steadily eroding it. Still, it's clear that at 24 times the revenue it's generating, the theater owner's valuation is inflated.

To date, it's been a test of wills between short-sellers and retail investors, but a wobbly global economy seems to indicate the latter has the weaker hand that can't maintain its position in the face of a recession.

There appears to still be too much air between AMC's stock and reality, and I wouldn't want to be holding the theater operator's stock if the one-day market sell-off turns into a prolonged rout.