by Staff Reports Money Morning, Money Morning
— this post authored by Mike Strenger, Associate Editor, Money Morning
AMC stock is not a long-term buy right now, and investors will be surprised to find out why.
AMC Entertainment Holdings Inc. (NYSE: AMC) suffered through the pandemic in 2020. People started to imagine a world without movie theaters.
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Now, with the streaming industry on the rise – along with the size of home televisions – many still imagine such a future, COVID-19 or no COVID-19. Studios today will even release new films straight to streaming services rather than theaters.
Most of the sentiment driving the AMC stock forecast today takes this into account.
You might be surprised at how many in your neighborhood still love the silver-screen experience and butter on their popcorn. But is it enough?
Sure, AMC received a few other catalysts this year.
AMC was among the most mentioned stocks in the short squeeze frenzy of early 2021. Young traders on the Internet wanted to stick it to hedge fund bears and squeeze them out of their short positions.
GameStop Corp. (NYSE: GME) soared as high as $347 after starting the year at $17. It was a 1,941% return. AMC stock made a similar gain to $62 from just $2, a 3,000% rise.
This happened because retail traders saw these stocks had high short interest. They believed that if they started a buying wave to pump the price, the hedge funds shorting the stocks (betting on their decline) would have to buy them back to cover their short positions.
Current short interest in AMC is over 85 million shares. That is down from 91 million shares but still near 20% of the stock’s entire float. It was up at 21% at one point.
But you can’t look at AMC stock today from the short squeeze angle alone. We need to look at the fundamentals to make a case for the company in the years ahead.
GameStop’s growth wasn’t merely due to traders wanting to help a shorted stock. These traders also grew up buying and trading games with GameStop. It had to do with the company itself. The company received further name recognition and a cash injection as a result.
Can we say the same about AMC?
Is AMC More Than a Meme Stock?
The reason for growth in AMC stock was more than a few retail traders wanting to “stick it to the man.” Plenty have missed the movies and still want to pay top dollar for a night out.
Pre-pandemic, 14% of people said they visit a movie theater once or twice a month. One-hundred and nineteen million Americans claim to have TVs at home. Fourteen percent of that is a market of 16 million.
So, movie theaters are fighting for around 16 million tickets at least once a month. Theoretically, that’s $160 million in revenue per year. And those are just the movie-theater devotees.
As the economy reopens in 2021, we’re likely to see more pent-up demand in movie theaters – that is, the average person is more likely to attend.
AMC is one of the biggest movie theaters in the United States. In addition to being one of the most recognized names, it also leads the industry with more than 8,000 screens across the country.
The AMC short squeeze sure fueled the stock. But the 2021 reopening will as well.
Movies are not quite dead, yet. But if they are, could they come back in some other form?
Here’s what AMC is doing to answer that question.
AMC Is Strengthening Its Top Line
We know that AMC is capitalizing on the jump in price to make up for losses during the pandemic. The company recently announced June 1 that it would sell 8.5 million of its own shares.
This can be a good sign for investors. Selling those shares at today’s $50 price versus $2 last year shows the company wants to take command of its balance sheet.
In the case of AMC, the company wants to grow. It will reportedly invest the cash from stock shares into further acquisition opportunities.
The 8.5 million shares will bring in about $230 million in cash, which can be used to upgrade theaters and buy new ones.
We also know this is not merely a desperate move to raise capital, because the number of shares sold only represents 1.7% of the company’s total share capital.
This is still a debt-heavy company, with $5.4 billion in liabilities to $10.5 billion in assets. This could continue to be a concern as AMC leases new theater buildings.
This will, of course, rely on how theaters perform down the line.
While there will always be a contingent of movie-goers, the question is still whether it will be enough to drive stock prices like we’re seeing today…
AMC Stock Forecast for 2025
Net losses at AMC are predicted to shrink over the next couple years. Last year was a nightmare, when AMC lost $16.15 a share. For 2021, the expected annual loss is $3.28.
Analysts see the loss margin getting even smaller in 2022, at just $0.94 per share.As for the stock price, the 12-month average analyst forecast is $5.25, significantly lower than today’s price of $53. The highest analyst target appears to be $16.
Along with the general analyst providing targets nowhere near today’s price, we also see some reversing their bullish stances on the stock.
Eric Wold of B. Riley Securities went from “buy” to “neutral” on AMC back in May.
Another analyst, Alicia Reese of Wedbush Securities, made it clear that the AMC stock price today is inflated. Due to the meme stock craze, it’s so volatile, you can’t really predict where it will be in the next hour or day.
Reese said that it’s “unclear how long this is going to last” in reference to the meme stock movement. Additionally, because AMC CEO Adam Aaron has played into the “grass roots” growth of AMC stock, giving retail investors 80% of the company, Reese says “it could be a while.”
Had the pandemic not occurred, AMC might have been on track to disappear from the NYSE by 2025.
Bankruptcy was certainly on the table as debt was growing each year. Combine that with straight-to-streaming movie releases, and who knows where the company would be?
The money they made from the stock sell during the huge rally might have helped. But we don’t see shares beating analyst estimates by much after that.
Just look at AMC’s current valuation compared to pre-pandemic levels. Today, the company has a market cap over $26 billion. In 2019, it was just $75 million.
In fact, the AMC market cap has waned every year since 2016. It fell 48% in 2017, then 33% from in 2018, then 40% in 2019. The current valuation is absolutely an anomaly not based in reality.
You might see a few more jumps in the stock price over the next year due to pent-up demand. But the fundamentals, even with a shrinking debt load and a high-profile brand, are not enough to sustain it.
If the AMC stock price does plummet and these analysts are correct, it could be a solid bet on the movie theater industry at those levels.
But right now, to say AMC stock is overpriced is an understatement.
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