AMC Entertainment (NYSE:AMC) has seen a boost in momentum over the past week, now up 21.22% after investors began a buying frenzy. The rally ended a one month downtrend in July which saw the stock reach lows of $28 a share. The now infamous WallstreetBets community on Reddit, has also seen a large spike in AMC stock mentions.
Investors are now custom to large spikes in AMC trading volumes with little to no fundamental explanation. Interestingly, we have seen some Wallstreet institutions turn tides on AMC stock with firms such as Morgan Stanley and Renaissance Technologies increasing their holdings of AMC stock. Investors are now asking the question if this meme rally can be sustained over a long period of time? This article will breakdown the AMC stock forecast and explore the key parameters driving this rally.
Why is AMC stock rallying again?
Firstly, it is important to understand what is driving the trading value of AMC stock. Since the beginning of 2021, interest in AMC stock has skyrocketed after the initial short squeeze of GME stock in January. Driven by the reddit group, WallstreetBets, investors initiated a short squeeze which saw gains of 1,100% in GME stock alone before it came crashing down.
However, serious gains in AMC stock were not realised until May when the stock jumped nearly 400% over a week period reaching a $72.62 52 week high. So what drove this rally if the hype surrounding GME stock had fallen?
In June, the AMC stock short interest was stubbornly high despite the interest from retail investors. The stock had a 17.65% Short Interest prcentage of float, which is considered high in comparison to market averages. Generally speaking, a short float below 10% suggests the stock has a bullish sentiment while over 10% indicates a higher level of pessimism towards the stock.
Interestingly, AMC stock is actually trading with a higher short float than compared to its June levels. Nevertheless, investors pushed the price to all time highs in June which drove extreme levels of investors interest looking to make a speculative gain.
Revenue outlook for AMC stock
Prior to COVID-19, AMC was running at a net loss of $149.1 million as of December 2019. AMC generated similar annual revenues in 2018 and 2019 of $5.460 Billion and $5.471 Billion respectively. The revenue outlook for 2022 suggests AMC will not reach its pre-COVID revenue levels. The average annual revenue forecast suggests the company will generate $4.6 Billion in 2022. The staggered revenue growth is due to a few keys reasons investors should be aware of.
What factors are behind the AMC revenue forecasts
Firstly, the growth of streaming platforms during COVID-19 has been exponential with companies like Netflix and Amazon capitalising on newly found demand. Jim Chanos, founder of Kynikos Associates noted on a CNBC interview that AMC is facing reduced demand due a shift towards streaming services over movie tickets.
Secondly, forecasted box-office revenues are looking more bearish with MKM Partners analyst Eric Handler noting AMC is unlikely to make breakeven cash flow this year as a result of slower revenue outlook. This outlook is not what AMC investors want to hear as the industry remains under some threat of a slower than expected rebound.
Lastly, the question remains whether the Delta variant and future variants will have a longer term impact on AMC stock. Currently, the US vaccination rate (fully vaccinated) has staggered around the 52% mark with the delta variant driving higher hospitalisation rates in some states.
However last week, we saw the approval by the Food and Drug Administration of the Pfizer vaccine. AMC stock jumped higher on this news as investors made the link between increased vaccination rates and higher attendances in AMC cinemas.
Which institutions are buying AMC stock?
With plenty of debate surrounding the short interest on AMC stock, we will take a closer look at which institutions are buying AMC stock. According to MarketBeat data and recent SEC filings, two of AMC’s largest institutional shareholders increased their positions in AMC stock. Vanguard Group and Black Rock currently hold $2.52 Billion and $1.73 Billion respectively. Other notable institutions which increased positions in their last reported quarter include Charles Swab, Renaissance and Morgan Stanley.
It is worth noting these positions in AMC actually represent a small portion of the Net Asset Value of the portfolio. For example, Vanguard Groups holdings currently represent a 0.01% weighting in their portfolio. The extreme diversification and scale of these institutions reduces the overall risk compared to a retail investor.
Wallstreet remains bearish on AMC stock forecast
Firstly, if we remove AMC’s current trading valuation and we take a closer look at the companies valuations at a fundamental level, the story changes dramatically. The average 12 month valuation of AMC stock on Wallstreet is a mere $5.58. Earlier this month, Credit Suisse analyst Meghan Durkin lowered her industry box office revenue forecast to $4.6 Billion from $5.1 Billion in 2021.
The analyst expects industry box office revenues to increase next year with a $7.3 Billion estimate for 2022. The analyst highlights the lower forecasts ultimately reduces revenue projections for AMC in both years. Durkin maintains an Underperform rating and $1.55 price target on the analysts AMC stock forecast.
The price targets from analysts are a forward looking valuation based on multiple fundamentals such as EBITDA forecasts and industry valuations. However, the bearishly low target from Credit Suisse comes at no shock with the average price target suggesting a 90% downside. With AMC trading well above their Wallstreet valuations, why does this factor matter?
Investing in the modern era has changed the way investors interact with the stock market. However fundamentals such as valuations still hold use to the investor. By buying a stock trading well above their valuation, investors can be exposed to greater risk over the longer term.
In saying this, there are extreme examples such as Tesla, who generally trades above their Wallstreet valuation. However, Tesla has an exponentially growing market which they are currently dominating. In comparison, AMC are facing the threat of a growing streaming industry which is expected to impact revenues.
Is there a future for meme stocks like AMC?
The long term future of AMC has been a highly debated topic in recent months. This is due to multiple threats facing the business alongside AMC stock trading at extreme multiples. The bearish sentiment on Wallstreet is a reflection of AMC’s fundamental valuation. However, the continued support for AMC stock at a retail level has become something more than just fundamentals.
Given the information we have on the outlook of the box-office industry, we can conclude AMC will be facing an upward battle to reach pre-covid revenue levels. At least for the next few years. Facing changes to the entertainment industry will be a fundamental challenge AMC management will have to adapt too.
From micro-economic data, global box office revenues are currently forecasted to reach $43 Billion by 2025. To put this into perspective, prior to COVID-19 the estimated global box office revenue for 2020 was $44.5 billion. From this data we can see the damaging effects of COVID-19 which has staggered future outlooks on box office revenues.
In saying this, the AMC stock rally has enabled AMC to raise a significant amount of equity which has improved the current liquidity of AMC. In the second quarter, AMC raised $1.25 billion of new equity capital, which boosted liquidity over $2 Billion.
“Our deeper cash reserves allow us to stay the course, to innovate again and to capitalize on opportunities around us. In short, as the largest movie theatre operator in the world, AMC is playing on offense again.”
said Adam Aron, Chairman and CEO of AMC on Q2 earnings
The Bottom Line – AMC stock forecast
Overall, we can conclude AMC has multiple economic hurdles to jump over the next few years. However, the interest in AMC stock has remained stubbornly high despite lower interests in other meme stocks. With plenty of uncertainty surrounding the companies future, we will be keeping a close eye on how AMC management can adapt to the rapidly changing entertainment business.
The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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