The 5 Worst Reasons to Buy AMC Entertainment Stock

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Following a pandemic-whipsawed 2020, the most prominent development of the current year has been retail investors asserting their presence on Wall Street.

For nearly three months, retail investors on Reddit’s WallStreetBets chat room have been banding together to buy shares and out-of-the-money call options in companies with high levels of short interest. The goal for these predominantly young and/or novice investors is to create a short squeeze — i.e., an event where pessimists who want to see the share price of a stock decline are driven out of their positions by rapidly rising share prices.

Retail investors have been successful in effecting a short squeeze in a handful of securities. Although video game and accessories retailer GameStop might be the most famous, it’s movie theater chain AMC Entertainment (NYSE:AMC) that’s sort of become the battleground stock between Reddit traders and Wall Street.

A small pile of one hundred dollar bills on fire.

Image source: Getty Images.

Unfortunately, many of the reasons retail investors have chosen to buy into AMC are, for lack of a better word, awful. If your buy thesis pins on one or more of the following five ideas, you might end up kissing a significant portion of your investment goodbye.

1. “AMC’s share price is too low”

One of the worst reasons to buy into AMC is that you think its $9.36 share price looks cheap relative to the $20 it went for as recently as September 2018. The issue with this buy thesis is that share price is meaningless without taking outstanding share count into consideration.

For instance, AMC ended 2018 with 135.5 million shares outstanding and a share price of $12.28. Doing the math, this works out to a market cap of $1.66 billion. As of this past weekend, AMC had 450.2 million shares outstanding. Based on its $9.36 share price, its market cap is $4.2 billion.

To put this into some context, AMC’s share price is down 67% over the past five years, but its market cap has jumped by 54%. AMC’s market cap over the past two months is higher than at any point since it became a publicly traded company in December 2013. The thesis that AMC is cheap based on its share price doesn’t hold water.

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2. “A short squeeze is imminent”

Arguably the most common buy thesis I hear for AMC among Reddit investors is that it’s primed for a short squeeze. The unfortunate part is the dynamics that helped fuel a short squeeze in late January and early February no longer exist.

For a short squeeze to occur, the right recipe is needed. First, there needs to be a high level of short interest relative to a company’s float (i.e., its tradable shares). In AMC’s case, 49.3 million shares were being held short in mid-March, compared to a float of 404 million shares. This represents short interest of 12%. That’s definitely higher than the average publicly traded stock, but it’s not off the charts. In fact, the percent of float held short for AMC has declined from close to 40% to just 12% over the last four months.

Furthermore, the company’s short ratio (also known as days to cover) has declined considerably. In October it would have taken short sellers over three days to exit their positions. Today, AMC’s high daily trading volume would allow pessimists to cover in a matter of hours.

A couple eating popcorn while watching a film in a movie theater.

Image source: Getty Images.

3. “99% of its theaters have reopened”

Retail investors are also gung-ho about AMC’s reopening its theaters. As of March 26, the company forecast that 99% of its theaters would be open for business. While I freely admit that open theaters in any capacity is better than completely closed theaters, the buy thesis is missing a number of key points.

To begin with, it’s not as if AMC’s theaters will be operating at full capacity anytime soon. With new variants of COVID-19 circulating in the U.S., we’re in a race to vaccinate as many people as possible. If too few people are vaccinated, these variants can minimize the effectiveness of coronavirus vaccines and push the prospect of herd immunity much further down the line.

In addition, AMC’s film exclusivity has taken a pretty big hit during the pandemic. AT&T‘s WarnerMedia has chosen to release all of its news films in 2021 on HBO Max the same day they’ll hit theaters. Walt Disney is making a similar move with a handful of films on its Disney+ streaming service. Moving forward, AMC could be looking at significantly reduced exclusivity, which will hamper its turnaround efforts.

According to Wall Street, AMC isn’t expected to hit its pre-pandemic level of annual sales until closer to 2024.

A magnifying glass held over a company's balance sheet.

Image source: Getty Images.

4. “I like to go to the movies”

Investing great Peter Lynch has always been a big fan of buying what you know. But Lynch also recognizes that there’s a lot more to a great investment than simply liking or using a product. From what I’ve observed on social media, quite a few retail investors love going to the movies but are allergic to digging into AMC’s income statements and balance sheet.

From a balance-sheet perspective, AMC noted in its fourth-quarter operating results that it had more than $1 billion in cash on hand. This is after issuing close to 165 million shares and over $400 million in debt capital between mid-December and mid-January. But it ended 2020 with $5.7 billion in debt, and some of the debt it’s issued since March 2020 has interest rates ranging from 10% to as high as a variable rate of 17%. Servicing this debt is going to be extremely challenging, and it’s going to minimize what AMC can do with regard to growth initiatives.

As for its income statement, AMC reported negative-$1.3 billion in free cash flow last year. This figure should improve with the company’s theaters now open in some capacity. However, profitability remains a long way off. Over the next 24 months, AMC doesn’t look to have enough cash to cover its losses.

Investors are welcome to like a business — but investing in it without knowing the fundamental details is a big mistake.

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Image source: Getty Images.

5. “If we buy and hold, the hedgies lose”

Lastly, there’s the idea that if retail investors buy up the float and hold on to AMC stock, they’ll be sticking it to the “hedgies” — a term assigned to Wall Street hedge funds and institutional investors. This, too, is a misguided buy thesis.

Even though the percentage of AMC shares owned by institutional investors has been more than halved since October — this is likely a function of the company’s tripling its outstanding share count — data from YCharts shows that institutions are still holding 32% of all shares. That’s a significant chunk.

What’s more, the bulk of trading volume these days derives from high-frequency trading programs and not from retail investors or even hedge funds. There’s never going to be an instance where retail investors own such a significant amount of the float that they’ll be able to block downside moves in AMC stock.

As is the case with every publicly traded company, operating results, not emotions, are what’ll dictate AMC’s long-term share-price performance. With the company facing clear cash concerns over the next two years, it’ll likely be forced to, once again, dilute the daylights out of its shareholders to stay afloat.

In sum, the Reddit buy theses for AMC make little to no sense.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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