New hit movie Top Gun: Maverick, starring Tom Cruise, racked up $156 million in domestic box-office sales in its opening four-day weekend, a Memorial Day weekend record.
It's a reminder that people are returning to theaters as the pandemic subsides, something investors in movie theater chain AMC Entertainment Holdings (AMC 3.96%) are undoubtedly thrilled about.
But they also shouldn't lose sight of the main plot for AMC -- the company's financial red flags are unlikely to go away even if revenue gets a temporary spike from Top Gun. Here's why AMC could continue struggling in future quarters.
AMC is rapidly losing money
The revival of movie theaters has already begun showing up in AMC's operating results. AMC saw revenue rebound in 2022 Q1 to $785 million from just $148 million the prior year.
Image source: Getty Images.
Ideally, the surge in business would mean that AMC's theaters are operating more efficiently, having more people in the seats to offset the cost of running them. Unfortunately, the company's free cash flow went in the wrong direction last quarter, falling $5 million year over year to negative $329 million.
In other words, the company lost more cash despite revenue increasing more than fivefold. I don't doubt AMC will see a bump from Top Gun, but will it make a significant difference in for the company's cash flow? At this point, there's little evidence it will.
Playing the numbers game
AMC's balance sheet is a big problem management can't meaningfully address while the business continues to burn so much cash. The company has $5.5 billion in debt, creating almost $390 million in interest expenses over the past year.
It has enough cash to get through another four or five quarters (at this rate) before it runs out of cash, so management won't be able to do much besides making the minimum payments on its debt for now.
AMC Total Long Term Debt (Quarterly) data by YCharts
This creates a couple of problems for investors: First, interest rates are going up, which could raise AMC's interest expenses if the company is forced to refinance any debt at higher rates. The other option would be for AMC to issue new shares to raise money, something it did a lot of during COVID-19. But that would further dilute shareholders who have already watched as the company's share count ballooned from approximately 104 million in Feb. 2020 to over 515 million as of last month.
AMC isn't worth a premium
You can see below how the stock's valuation measured as a ratio of AMC's enterprise value to its revenue is still 169% higher today than a decade ago. Why is that relevant? One could argue that theaters were a much healthier business before streaming emerged as a mainstream alternative. The business has weakened, but the stock is more expensive.
Data by YCharts.
Investors are paying a higher valuation for the stock despite the company's increased debt load, its struggle to generate cash flow, and its likely need to raise money (again) in the near future. Some investors have made money off of meme stocks like AMC over the past few years, but don't assume AMC will be a profitable long-term investment -- the fundamentals don't convey that message.
