AMC Entertainment's (AMC 1.79%) stock had explosive success in 2021. It caught the attention of a group of traders who encouraged each other to buy and hold AMC stock regardless of anything they read or heard as part of an effort to "short squeeze" those who were bearish on the company's prospects.
Meanwhile, AMC's actual business struggled for much of the year to recover from the devastation caused by the pandemic to its theater chain operations. Here are three reasons why investors should separate themselves from AMC stock in 2022.
1. AMC stock is too expensive
Despite the stock price falling nearly 60% from 52-week highs set earlier in the year, the short squeeze price surge has AMC's stock still trading up nearly 1,300% for the year. The increase had little to do with an improving business. In the nine months ended Sept. 30, attendance at AMC's theaters stayed relatively flat from the previous year. Instead, the stock price increase was driven primarily by the continued support of a group of retail traders.
AMC has lost $1.2 billion on the bottom line through nine months this year with little hope of turning the losses around any time soon. The company had trouble operating at a profit consistently even before the pandemic, adding the disruptions of a potentially deadly virus in circulation, reducing its chances further.
In perhaps further evidence the stock is overpriced, some AMC management are dumping their shares.
2. A declining industry
The movie theater industry was in secular decline even before the outbreak of COVID-19. Stakeholders were slow to adapt to changing consumer preferences. It's hard to imagine another industry with less innovation in the last two decades than movie theaters.
While the experience has stayed roughly the same, prices to attend a movie have skyrocketed. Before accounting for rises in 2021, the average movie ticket price in the U.S. went from $5.66 in 2001 to $9.37 in 2020.
That can partly explain why movie ticket sales have steadily dropped from 1.48 billion tickets in 2001 to 1.24 billion in 2019. The trend is unlikely to reverse unless the movie theater industry can improve the customer value proposition.
3. A fragile balance sheet
AMC management did an excellent job at the pandemic onset, when its theaters were closed to the public, securing enough cash to ensure the company survived until it could reopen. However, the steps taken to raise some money have put AMC's balance sheet in a precarious position. The company has $5.4 billion in long-term debt, costing it hundreds of millions in interest expenses annually.
What's more, AMC is unlikely to have enough cash on hand to pay the principal balances when they eventually come due. It will hope to refinance the debt. As of its third quarter ended Sept. 30, AMC had $1.6 billion of cash on hand. The figure will likely continue to dwindle. In Q3, AMC lost $114 million in cash from operations.
To sum it up, AMC's business prospects are poor in the near and long term. The balance sheet is dangerously high in debt. The stock price is so overvalued that AMC will find it difficult to justify the high price through improved earnings. Prudent investors will stay far away from this stock, and if you find yourself already in possession of AMC stock, now would be an excellent time to sell.