A few companies have started adding Bitcoin (BTC 1.18%) to their balance sheets as a substitute for ultra-safe cash and bonds. Others have taken advantage of skyrocketing share prices by issuing new stock certificates. A handful of brave corporations have even combined the two strategies lately, raising cash through stock offerings and investing some or all of it into Bitcoin tokens.
Movie theater operator AMC Entertainment Holdings (AMC 13.19%) raised $2.06 billion of cash over the last four quarters, staving off the threat of bankruptcy in a time of coronavirus restrictions and deeply negative cash flows. Should AMC convert some of its sorely needed cash reserves into digital coins?
Some would call it a reckless move, and they aren't wrong. However, the idea isn't completely crazy -- as long as AMC goes deeper into the cryptocurrency market with some caution.
A risky idea
Buying Bitcoin tokens for the purpose of holding them on your corporate balance sheet is not a common practice. The standard-bearer here is business analytics company MicroStrategy (MSTR 3.89%), which has invested $3.7 billion in a Bitcoin collection now worth $5.8 billion. This company reinvested most of its long-term investment papers in Bitcoin tokens in the second half of 2020, raised $2.4 billion in new debt and another $400 million in a stock offering for the sole purpose of buying even more tokens. MicroStrategy also sweeps its free cash flows directly into -- you guessed it -- buying more Bitcoin.
MicroStrategy's Bitcoin collection is worth $5.75 billion at current conversion prices. The company's market cap is $5.66 billion, or 1.6% less.
That strategy could pay off handsomely if Bitcoin prices deliver meaningful growth in the long run. MicroStrategy could gain billions of dollars from its digital investments under the right circumstances, where Bitcoin prices double or triple in 2022. Sounds effects like "ka-ching" and "bingo" would be appropriate in that case, and MicroStrategy could leverage its surging Bitcoin investments to grow and enhance its core business.
It could also backfire horribly under different circumstances. For example, Bitcoin prices might stall and crash again, like they did after another raging growth spurt in 2017. Or, another digital currency might push Bitcoin off the throne and take over as the obvious choice for digital currency investments. Both of these possibilities would smash Bitcoin's high-flying price to the ground. It could take years to regain what was lost, and there's no guarantee that Bitcoin would ever recover.
MicroStrategy might survive a Bitcoin meltdown, at least for a few years. The company makes money on its business analytics operations, reporting $64 million in earnings before interest and taxes over the last four quarters. A cryptocurrency crash would be painful and the dream of digital wealth could vanish in a heartbeat, but the company should survive.
AMC shouldn't go all in on Bitcoin
The movie theater chain enters the picture from a very different angle.
AMC's operating profits were barely positive in 2019, clocking in at $169 million on top-line sales of $5.5 billion. That works out to an operating margin of just 3.1%. MicroStrategy is boasting a 12.6% reading on the same metric right now while AMC's operating results have been clobbered by the pandemic. AMC showed a $1.7 billion loss from operations in the trailing four quarters.
Left to its own devices, MicroStrategy can scrape by while generating respectable revenues and profits from its ordinary business operations. AMC could burn through its cash reserves in a year or so if the movie business stays unprofitable. To keep the lights on, the company might need unfortunate tactics such as raising more debt, selling more stock, or asking its debtholders for a break on interest payments.
Don't believe me? Just watch:
The company has indeed resorted to these ideas to make it through the pandemic. AMC has increased its long-term debt balance by 15% while the diluted share count was multiplied by five in this year's rush to cash in on unreasonably high share prices.
Converting all of AMC's long-term capital into Bitcoin would be a risky idea indeed. The company would bet the proverbial farm on the future of Bitcoin pricing, accepting that a weak year or two could trigger bankruptcy proceedings.
A safer approach
MicroStrategy's all-in bet on Bitcoin is an extreme example, of course. Other companies have added much smaller Bitcoin servings to their long-term holdings.
Electric vehicle maker Tesla (TSLA -1.37%) has invested $1.5 billion in 43,200 Bitcoins, and digital payments specialist Block (SQ -0.99%) bought 8,000 tokens for $220 million. These investments are substantial, but they also represent vanishingly small portions of each company's investments and cash equivalents.
- Tesla had $16 billion of liquid cash on hand at the end of the September 2021 quarter. Digital tokens account for just 11% of Tesla's cash and investments.
- Block's liquid assets added up to $6.9 billion at the same point in time, along with another $1.5 billion in long-term debt securities. $392 million in current-value Bitcoin works out to just 4.4% of this company's total cash and investments.
That would be a safer idea for AMC. Holding a small slice of its cash in this risky but promising form could pay big dividends in a future of rising cryptocurrency prices -- without adding much risk in the case of a negative outcome.
What if AMC funneled something like $200 million of its $1.7 billion investable cash reserves into Bitcoin tokens?
That's an 11% slice, comparable to Tesla's lukewarm Bitcoin bet. Growth investors like ARK Invest's Cathie Wood expect Bitcoin prices to rise tenfold or more over the next five years. Under those favorable circumstances, AMC would yield $2 billion of extra cash in five years -- a game-changing result that could help the company stay afloat for years to come. And if things go bad, well, AMC burned more than $200 million of free cash in seven of the last eight quarters. Another cash-burning setback on that scale is basically a rounding error.
AMC should buy some Bitcoin (but it's still a deeply troubled stock)
So AMC could make a small investment in Bitcoin tokens to set itself up for some potentially life-saving gains without adding much risk to the picture. At the same time, retail shareholders would flock to the forward-looking move, perhaps enabling the company to raise more cash through another (less popular) stock offering.
Let's be clear: AMC is overvalued at pretty much any price these days. A daring Bitcoin investment would save the day only if the company also revamped its business model on a massive scale. Maybe the only viable way forward is to abandon the movie theaters altogether, turning the company into a digital assets manager instead. I'm not a buyer of AMC stock today, whether or not the company embraces cryptocurrency investments.
But a modest digital investment would at least give AMC a fighting chance to become a better version of itself. I think it's worth a shot.