Nearly five years ago, AMC Entertainment (AMC 7.31%) was not just one of the top meme stocks. It was one of the "meme kings," alongside GameStop (GME +0.73%). During the initial 2021 wave of meme stock mania, shares in both companies surged to record prices, a rally fueled almost entirely by speculation and hype.
Although the trend peaked not too long after it started, shares in both companies managed to hold on to a fair amount of their respective meme gains for quite some time. In fact, GameStop -- trading in the low $20s today -- is still technically up from its pre-trend level.
Unfortunately, it hasn't been the same story for AMC. Shares in the movie theater chain are down over 99% from their meme highs, and down over 35% just this year alone. Worse yet, while seemingly a bargain today, much suggests AMC still trades at an inflated valuation and could be vulnerable to further price declines.
Image source: Getty Images.
The rise and fall of AMC Entertainment
In early 2021, AMC was in bad shape. Like other movie theater chains, the pandemic had a severe impact on its business. Burning through cash put the company at risk of bankruptcy. Hence, many hedge funds bet heavily against it by shorting the stock.
However, after their success coordinating an epic short squeeze with GameStop, many of the same retail traders piled into AMC, attempting to pull off the same trick. At first, this was successful. From January to June 2021, AMC surged from a split-adjusted $20 per share, to well over $500 per share.
Yet as a result of this huge surge in price, AMC began selling newly issued shares to raise money. While this brought in much-needed cash, it also led to heavy share dilution. Add in AMC's struggles to return to pre-COVID levels of revenue and profitability, and it's no surprise that meme mania faded, and the stock has since experienced a steady drop.
NYSE: AMC
Key Data Points
Low-priced but not a bargain
At a little over $2.50 per share, AMC Entertainment may seem dirt cheap. But don't mistake a low stock price for a low valuation. AMC has yet to return to profitability under generally accepted accounting principles (GAAP). But it is profitable on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), so we can value it using the enterprise-value-to-EBITDA metric (EV/EBITDA).
By this measure, the stock appears quite pricey. At an EV/EBITDA ratio of 21, shares trade at a valuation many times that of competitor Cinemark Holdings, which trades at an EV/EBITDA ratio of only 8.
Admittedly, this stock may experience another temporary surge in the coming days. AMC reported earnings on Wednesday, Nov. 5. Yet even if shares do surge in response to better-than-feared results, the bullishness may not last. Forecasts still call for U.S. movie theater revenue to not finish recovering to pre-COVID revenue levels until at least 2029.
Moreover, even if you're more bullish than the market on a movie theater attendance revival, cheaper stocks like Cinemark are out there to buy. With this, whether in the near term or the long term, don't get your hopes up on this failing "meme star." It's a risky play.
