AMC Entertainment Group (AMC -1.17%) has seen its stock price fall more than 30% in the last month. It appears some investors are losing enthusiasm for the meme stock. AMC was catapulted to fame when a group of traders got together and encouraged each other to buy and hold its shares. That plan was part of a bigger scheme to force a short squeeze on the stock.
Some might consider this 30% drop a chance to get in on the apparently now-revitalized stock. But for investors who really do take a company's financial and business prospects into consideration, the 30% drop in AMC's stock price still does not make it a buy. Let's take a closer look at why.
Movie theaters were experiencing decreasing attendance even before the pandemic. Image source: Getty Images.
AMC is facing a tough road ahead
As a company, AMC was having difficulty turning a profit even before the coronavirus pandemic began in early 2020. In five of its last 10 fiscal years, the company lost money on the bottom line. Movie theater attendance has been on a relatively steady decline as more consumers find alternative ways to get their entertainment, like streaming.
From a consumer standpoint, the trend is understandable. The price difference between entertaining a family using a streaming service versus a movie theater has grown wider and is strongly in favor of streaming. The most expensive tier of a Netflix subscription costs less than $20 per month. The Disney+ service is less than $10 per month. One movie theater ticket for one person now averages nearly $10 and is much high than that in the bigger cities. It's no surprise that the number of movie tickets sold in the U.S. and Canada fell from 1.42 billion in 2007 to 1.24 billion in 2019, according to Statista.
Then there was the coronavirus pandemic, which crushed the industry further. AMC's revenue fell from $5.5 billion in 2019 to $1.2 billion in 2020. Management did everything in its power to keep the company afloat during the several months where its theaters had to close completely, including issuing more shares of the company. As a result, AMC had 513 million shares outstanding at the end of the third quarter, up from 108 million at the same time last year. Management sold additional stock to raise cash but it has only partially and temporarily resolved AMC's problems.
It also created some long-term problems. If AMC does eventually return to profitability, each share's value in terms of earnings per share has been significantly diluted. For instance, if AMC were to earn $1 billion in net income in 2022, under the 513 million share count, each share would generate $1.95 in EPS compared to the $9.26 in EPS that would be generated from the 108 million share count.
Management is trying to find solutions to its issues and has even considered some moonshot ideas like issuing cryptocurrencies or non-fungible tokens (NFTs) to hit it big with one of them. It remains to be seen if any of them will improve revenue and profits. One thing seems likely -- management needs to find some way to boost revenue that does not rely on selling movie tickets.
AMC's stock sell-off does not make it a buy
Despite the company being in worse shape in nearly every metric compared to before the outbreak, the stock is trading at a much higher price point than any time since early 2017. The 30% sell-off in the last month is bringing the stock closer to matching fair value, but there is a lot more room to go. After all, AMC's stock is still up over 1,350% year to date in 2021.
Either AMC's stock price has to fall further, or its revenue and profits have to expand substantially to make it worthy of consideration as an investment. As it stands, AMC stock is still not a buy.
