Nothing new here: analysts on Wall Street and elsewhere remain highly skeptical of AMC Entertainment (AMC) – Get Free Report based on subpar business fundamentals and meme stock valuation.
Seeking Alpha contributor Harrison Schwartz recently suggested that AMC Entertainment might not survive 2023. He cites AMC’s elevated interest costs, chronically negative operating income, and liquidity issues as the likely culprits of the demise of the movie theater chain.
Below, I present three of the analyst’s bearish arguments on AMC and list a few counterpoints to the idea that AMC’s days might be counted.
Read also: Has Naked Short Selling Been Driving AMC’s Stock Price?
Argument #1: 2022 marked the downfall of the “meme stock” trade.
“AMC has erased all its 2020-2021 gains and is now trading near its 2019 price range.”
Counterargument #1: While the “meme mania” observed in 2021 has undoubtedly died down quite a bit, retail investors’ interest in stocks like AMC and GameStop (GME) – Get Free Report remains high. According to ApeWisdom, these two stocks consistently rank among the top 25 most popular on key social media channels, currently beating the likes of Alphabet (GOOGL) – Get Free Report and many blue chip stocks.
Short interest remains elevated, to the tune of 22% of the float for AMC stock, which helps to keep the “risk” (or opportunity) of a short squeeze alive. The recent debates about naked short selling, which led to a strong rally in names like Genius Group (GNS) and Helbiz (HLBZ) early in 2023, suggest that AMC and its peers could still witness a surge in demand for their shares.
Argument #2: The movie theater industry is likely to struggle in the face of the rising popularity of streaming and other forms of in-home entertainment (e.g., sports betting, etc.).
“Box office ticket sales have declined across North America for the past two decades. […] If there is a continued decline in household financial stability in 2023, I expect US box office sales to take a hit.”
Counterargument #2: There is no question that COVID-19 accelerated a slightly negative long-term trend in movie-going and that, enabled by technology, consumers have more choices of entertainment today. Global economic uncertainty in 2023 would certainly not help.
But it would be a stretch to call for the downfall of the movie theater industry, or even something much less severe that moves substantially in that general direction.
True, AMC’s YTD attendance last quarter, at 151 million, was still remarkably lower than the 264 million reached in the comparable, pre-pandemic period in 2019. But the metric continues to rise at a dizzying pace of 120% over 2021 levels, despite soft box office numbers in August and September 2022, suggesting that the recovery process is far from over.
Argument #3: Valuations are grossly overstated relative to the company’s fundamentals.
“Given the immense dilutions the stock has faced since 2020, the company’s fair value is likely well below its current price.”
Counterargument #3: AMC “apes” have repeatedly argued that their investment thesis is not based on fundamental factors, but on market forces.
Yes, AMC stock’s current valuations should look unreasonable to most reasonable analysts and investors, considering that the company is still barely able to produce positive non-GAAP EBITDA. Yet, AMC stock could still climb for reasons that transcend the P&L.
Regarding balance sheet robustness, liquidity of $900 million (about three-fourths cash, one-fourth undrawn credit facilities) is far from comfortable for a company that burned nearly $180 million in cash in Q3.
Investors should pay attention here and check whether CEO Adam Aron will be proven right in his projection that “our cash burn [should] improve in Q4 with a return to positive operating cash generation”. In this regard, the current earnings season will be crucial for AMC and its stock.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)