AMC stock is up 3.100%. Should we buy or sell?

In a market like this, popcorn can become a signal to buy.

Actions of

AMC Entertainment Holdings

jumped more than 95% to an all-time high of $ 62.55 last Wednesday after the movie chain announced a new shareholder rewards program that includes a big free popcorn. The next day, a plan to sell 11.55 million shares (which eventually sold for an average price of $ 50.85) brought down AMC (ticker: AMC).

Even with Thursday’s drop, the stock has climbed 297% in the past nine trading sessions and is up 2,160% for the year.

After

GameStop

(GME) and

Blackberry

(BB), there seems to be little stopping from the latest hot meme stock, not even a warning from AMC itself: “Under the circumstances, we do not recommend that you invest in our Class A common stock, at unless you are prepared to take the risk of losing all or a substantial part of your investment, ”the company said on Thursday in the stock sale record.

Earlier in the week, AMC sold 8.5 million shares to investment firm Mudrick Capital Management, which sold its stake at a profit on the same day, Bloomberg reported. AMC called it “a very smart fundraiser so that we can grow this business.”

More dilution could happen. The company will ask shareholders to authorize the sale of an additional 25 million shares, starting in 2022, at its annual meeting next month.

Despite the unusual warning and dilution, some users doubled their enthusiasm for the action in online forums last week, noting that GameStop experienced similar volatility when it rose in January. This only confuses and outrages traditional investors.

“The surge in AMC Entertainment shares is another sign of the reckless, memes-focused investment landscape we find ourselves in today,” wrote David Trainer, CEO of investment research firm New. Constructs. “Wall Street insiders exploit the naivety of meme-stock traders. There is no fundamental reason to buy shares of AMC Entertainment.

Trying to identify a fundamental narrative that can justify AMC’s rise is admittedly difficult. Nonetheless, this is an exercise that could provide information to investors.

With the recent share sale, AMC has an enterprise value of around $ 35 billion, nearly six times what it was at the end of 2018, a record year at the U.S. box office. At that time, the enterprise value of the three largest publicly traded theater operators was around 1.6 times the total national box office. (Movie chains usually have a lot of debt, which makes the value of the business a better measure.)

AMC’s enterprise value is now around 17 times the terrible and pandemic-hit domestic box office of just $ 2.1 billion in 2020.

About two-thirds of sales typically come from tickets. The rest comes from soda and, yes, popcorn. The challenge for the industry is whether enough moviegoers are coming back and spending as before, after a year spent at home and streaming.

The company could go through a period of consolidation, as it did at the turn of this century, when a move to stadium seating drove some operators into bankruptcy and mergers. Regal Cinemas, one of America’s big movie chains, filed for bankruptcy in 2001. Coming out of bankruptcy, Regal became a cash-generating machine – fewer theater operators helped. And less now could usher in another era of higher returns on investment and better cash generation.

Indeed, the hope is that AMC can be opportunistic in the postpandemic world, perhaps by making acquisitions. Recent stock gains have made that hope self-fulfilling, allowing the company to raise new capital – $ 1.25 billion from the sale of shares in that quarter alone.

“With our increased liquidity, an increasingly vaccinated population and the imminent release of new blockbuster movie titles, it is time for AMC to go on the offensive again,” CEO Adam Aron said on Tuesday.

If AMC can increase its market share and if US box office sales return to 2018 levels, the company’s total sales could reach $ 9 billion – $ 6 billion in tickets and $ 3 billion in concessions. Sales in 2018 were $ 5.5 billion.

Then, if profit margins improve with better industry scale and if AMC’s investment in new theaters may decline because new capacity is not really needed, the company might be able to generate $ 600 million in free cash flow per year. This is about three times the cash generation potential of previous pre-pandemic years.

With $ 600 million in free cash flow, the stock’s free cash flow return is approximately 2.4%, based on recent prices. This return makes the stock expensive, but not completely unreasonable. the

S&P 500

the index trades for a free cash flow return of approximately 3.4%; other consumer discretionary stocks in S&P trade at a free cash flow yield of approximately 3.1%.

While this may offer a faint glimmer of hope for fundamental investors, the $ 600 million free cash flow scenario poses problems. There are a lot of ifs and powerful ones, and AMC has never generated such cash flow in the past.

Consolidation in the industry is not a guarantee of success either. AMC’s market share could increase, but there are still competitors: Regal Cinemas, now owned by

Cinémonde Group

(CINE.UK), and

Cinemark Holdings

(CNK).

Neither trades like AMC: Cineworld stock is up 283% from its 52-week low, but is down 78% from all-time highs, while Cinemark shares are up 183% from their 52-week low, but down 51% from their all-time high. AMC stock, by comparison, is up 2,320% from its 52-week low.

And AMC and its peers also have to compete with streaming. Windows for exclusive theatrical performances are shrinking, and the pandemic has accelerated that.

Wall Street doesn’t see the potential. Ten analysts are covering the stock and the average price target is $ 5.25. The highest is $ 18 per share. Before the pandemic, analysts’ average price target was $ 15. There was less AMC stock at the time. The old target prices implied an enterprise value of around $ 7 billion, a far cry from $ 35 billion.

Analysts do, however, have positive free cash flow forecast for AMC going forward – around $ 13 million in 2022 and $ 90 million in 2023.

At these levels, the fundamental argument for AMC action is, to say the least, a stretch. Yet overvaluation alone is never a good reason to sell a stock short, betting on falling prices. A high number of short stocks is usually a component of meme-fueled hikes. Nowadays, the risk of a short squeeze has become much greater than the potential market gain from realizing that a stock is too expensive.

Ultimately, investing and trading are different skills. Both can save people money. The important thing is not to confuse the two.

AMC investors can understand this. “I think for most retail investors that you see buying unlisted memes stocks, it’s really to prove a point,” says Natalie Camacho, a 27-year-old writer from San Fernando Valley, California.

She says she bought 11 shares of AMC in January for $ 100 as the wave of meme shares began to form. She expected the company to profit from the reopening of Covid-19.

Camacho says she felt the world of investing was closed to her because she didn’t have $ 10,000 to invest in stocks. On social media, AMC trading has been portrayed as a battle of the little guys against the big firms on Wall Street, which appeals to her.

“What attracts me is this common feeling, that we are all in the same boat,” she says. “It feels like if we put our money together, we might not be rich, but we will have enough to make a difference.”

No matter how it turns out, she is betting with money that she can afford to lose. By Thursday morning, his investment of $ 100 had risen to $ 460. “It might be a bad idea in the long run, but for now we’re sticking,” she said.

Write to Al Root at [email protected], Connor Smith at [email protected], or Avi Salzman at [email protected]

About Myra R.

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