There are a handful of stocks guaranteed to trigger heated debates in any room full of investors. AMC Entertainment Holdings (AMC -3.25%) is one of them.
The multiplex operator has been on a wild ride since early last year. Are you bullish? Are you bearish? Let's take a look at three reasons why you might want to buy shares of the world's largest exhibitor -- and at least one strong argument for selling the meme stock.
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3 reasons to buy AMC
Let's start with the obvious bullish feather in AMC's cap. Folks are finally starting to come back out to the movies. Paramount's (PARA -0.47%) Top Gun: Maverick shattered domestic box office records for the Memorial Day weekend. A big problem for the industry until now -- one that explains why box office receipts are down 42% year to date compared to 2019 -- is that hit flicks have been few and far between. Throughout 2020 and 2021, studios were hesitant to put out their blockbuster candidates because the pandemic made it too hard to lure crowds into theaters. But Hollywood is going all in this summer.
You'll see a sequential dip at the box office this weekend, but it might not be much of a dip given the rave reviews that the Top Gun sequel is receiving from critics and audiences. And the lull won't last beyond one weekend. Expect Jurassic World: Domination to put up huge ticket sales next weekend. Lightyear -- the Toy Story spinoff -- will draw young families to the local multiplex the following weekend. That Lightyear opening weekend should be huge, as it will feature three blockbusters, all of which will have been in theaters for three weeks or less.
The second reason to buy AMC stock now is that the company is gaining market share. There are a lot of reasons why it's even more of a force in its industry than it was before the pandemic-related shutdown. Its emergence as a meme stock has helped -- 4 million retail investors are out there actively talking up the brand. It also only helps that AMC kept its theaters open when rival Regal closed down a second time in late 2020 after the theatrical release of the latest James Bond film, No Time to Die, got bumped. Smaller players that lack AMC's financial resources have also faltered, and AMC is slowly and selectively adding some of those rival movie houses to its portfolio.
The third reason to buy this stock now is that per-capita spending is strong among the moviegoers coming to its multiplexes. Apparently, the trip from the living room couch to the movie house is also making lots of people hungry for the hot buttered popcorn, beverages, and snacks sold at the concession stand. AMC also made its own luck during the box office lull by ramping up mobile ordering across the chain. Consolidated food and beverage revenue per patron is 40% higher than it was in 2019. This is a pretty big deal since the concession stand is the key profit center for exhibitors. The majority of a new release's ticket sales revenue goes to the movie studios, but those high-margin food and beverage sales belong solely to AMC.
One reason to sell
The biggest reason red flag when it comes to AMC as an investment is its dilution. Through secondary stock offerings, management has grown its outstanding share count fivefold since the start of the pandemic, and most of that stock was sold by the company during the darkest stretches of the COVID-19 pandemic in early 2020, at much lower prices than prevail today.
This dilution stings in two ways. The not-so-obvious way is that it gets in the way of short squeezes. There are roughly 109 million shares of AMC Entertainment stock reported as sold short right now. If that had been the case three years ago -- when AMC had 103.8 million fully diluted shares outstanding -- its short interest would've been more than 100%. With 515.9 million shares out now, short interest amounts to around 21%. That's still high, but there's a lot of float to go through in a squeeze.
The obvious reason why that massive dilution hurts shareholders is that every share now represents a fifth of what it did before the pandemic. Let's flesh out the math. The $785.7 million in revenue that AMC generated through the first three months of this year is 35% below the $1.2 billion it served up in Q1 2019. However, divide those revenue figures by the fully diluted share counts, and you'll see that revenue per share has gone from $11.56 in the first quarter of 2019 to $1.52 in the first quarter of 2022 -- an 87% drop. You'll see the same issue crop up in the price-to-earnings ratio when AMC finally turns profitable again.
Are the bullish catalysts enough to outweigh the dilution-related valuation concerns? The long-term outlook is going to be challenging, but I think there will be too many positive headlines about the movie industry's turnaround this summer to keep this exhibitor's stock down for long.
