I don't think apes hibernate, but shares of AMC Entertainment Holdings (AMC -1.28%) have been dozing off since peaking this summer. Shares of the leading multiplex operator have fallen more than 60% since the the theater chain's June highs, and the stock is now sinking for the fourth month in a row. The monthly slides aren't small.
- September: (19%)
- October: (7%)
- November: (4%)
- December: (15%)
What's getting in the way of the turnaround at AMC? Let's go over a few of the reasons AMC's fundamentals are holding up better than the industry but its stock is not following the major market indices to new highs as 2021 comes to a close.
1. Valuation concerns are real
Despite Monday's close -- with AMC stock 60% below its peak six months ago -- the exhibitor continues to be one of this year's biggest gainers. A chart that looks good as you zoom out isn't necessarily a bad thing, but it does open the door to the valuation concerns that's keeping AMC stock out of the hands of seasoned valuation-oriented growth or value investors.
AMC is trading at an enterprise value that is 15.8 times trailing revenue. Smaller rival Cinemark (CNK -1.49%) is fetching just 5.8 times its top-line results. The gap widens if we look ahead to 2022, as Cinemark's expected to grow its revenue faster than AMC from this year's depressed results. This wouldn't be a problem if AMC was a high-margin business or at least in a high-growth industry, but it fails to check off either box. It's been profitable just once over the past five years, and net margin then was just 2%. Over the past eight years, AMC's net margin has failed to top a pedestrian 3.5%.
Bears are wrong about the near-term demise of AMC. It's going to stick around. However, with revenue for the current quarter expected to clock in 25% below the same three-month period in 2019 it's not going to resonate as an investment for growth investors and it's not cheap enough to ring a dinner bell for value investors.
2. Stock spike catalysts are flimsy
There isn't a buzzword that AMC isn't afraid to project on its silver screen. It's packing movie tickets with NFTs, vowed to accept crypto as payment, and even promised a push into mall retail with popcorn kiosks. These are moves that turn heads, but are they enough to move the needle when it comes to revenue generation? Do you think "diamond hand" crypto investors will want to generate a taxable event just because they want to see a new Marvel movie? Can you fathom anyone paying AMC concession stand prices for popcorn when they aren't a captive audience -- or how mall landlords will feel about having to beef up janitorial services to keep sweeping kernel-littered floors?
Shareholder theories about growth catalysts have also proved hollow. Short interest of 16.2% is at a four-month low, and with the share count exploding fivefold over the past year a short squeeze is going to be harder to justify. With the stock down sharply over the past few months the longs receiving margin calls are more likely to sell than the shorts buying to cover their profitable positions.
Conspiracy theories about naked shorts have been shot down by the silverback himself, CEO Adam Aron.
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
Speaking of Aron, he and AMC's CFO recently sold off a big chunk of shares. Would they really be selling if they felt that the mother of all short squeezes was coming? Would they be cashing out if the stock was undervalued?
3. Omicron variant concerns are rippling
Spider-Man: No Way Home had a huge opening two weekends ago. Audiences plummeted 68% a weekend later, a sharp sequential drop for a well-reviewed blockbuster. There are a lot of tentpole releases on tap for 2022, and that's great news for AMC and its fellow multiplex operators. If ticket sales start to sputter as consumers steer clear of theaters with this potent fifth surge of COVID-19 cases, we can see studios start to pull their releases again.
The near-term outlook is problematic for AMC, but the future doesn't have to be. AMC has stepped up as the leader of movie theater stocks, and Aron has done a great job of widening its lead during the pandemic lull. AMC doesn't have the financial flexibility to start buying back stock or reinstate its dividend to woo value investors anytime soon, but growth investors should keep an eye on AMC stock potentially paying off in 2022. Even the worst of losing streaks end eventually.