In a market like this, popcorn can become a Buy signal.
Shares of AMC Entertainment Holdings jumped more than 95% to an all-time high of $62.55 this past Wednesday after the movie-theater chain announced a new rewards program for shareholders that includes a free large popcorn. The next day, a plan to sell 11.55 million shares (which eventually sold at an average price of $50.85) sent AMC (ticker: AMC) tumbling.
Even with Thursday’s decline, the stock has soared 297% over the past nine trading sessions, and is up an eye-popping 2,160% for the year.
After GameStop (GME) and BlackBerry (BB), there seems to be little stopping the latest hot meme stock, not even a warning from AMC itself: “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment,” the company said on Thursday in the filing to sell the shares.
Earlier in the week, AMC sold 8.5 million shares to investment firm Mudrick Capital Management, which sold its stake at a profit that same day, Bloomberg reported. AMC called it a “very smart raising of cash so that we can grow this company.”
More dilution could be coming. 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 the dilution, some users doubled down on their enthusiasm for the stock in online forums this past week, noting that GameStop experienced similar volatility during its January rise. That just confounds and outrages traditional investors.
“The surge in shares of AMC Entertainment is yet another sign of the reckless meme-stock-driven investing landscape that we find ourselves in today,” David Trainer, CEO of investment research firm New Constructs, recently wrote. “Wall Street insiders are preying on the naiveté of retail meme-stock traders. There is no fundamental reason to be buying shares of AMC Entertainment.”
Trying to identify a fundamental narrative that can justify AMC’s ascent is admittedly difficult. Still, it is an exercise that might provide some insights for investors.
With the recent share sale, AMC has an enterprise value of about $35 billion, almost six times what it was at the end of 2018, a record-breaking year at the U.S. box office. At that time, the enterprise value for the three largest publicly traded theater operators was about 1.6 times the total domestic box office. (Theater chains typically have a lot of debt, making enterprise value a better measure.)
AMC’s enterprise value is now about 17 times the dreadful, pandemic-affected domestic box office haul of just $2.1 billion in 2020.
Roughly 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 return and spend as they did before, after a year of staying home and streaming.
The business might go through a period of consolidation, as it did earlier this century, when a shift to stadium seating pushed some operators into bankruptcy and mergers. Regal Cinemas, one of the large U.S. theater chains, filed for bankruptcy in 2001. Coming out of bankruptcy, Regal became a cash-generating machine—fewer movie-theater operators helped. And fewer now could usher in another era of higher returns on investment and better cash generation.
Indeed, the hope is that AMC could be opportunistic in the postpandemic world, perhaps by making acquisitions. The recent gains in the stock have made that hope self-fulfilling, allowing the company to raise new capital—$1.25 billion through stock sales in this quarter alone.
“With our increased liquidity, an increasingly vaccinated population, and the imminent release of blockbuster new movie titles, it is time for AMC to go on the offense again,” CEO Adam Aron said this past Tuesday.
If AMC can boost market share, and if U.S. box office sales return to 2018 levels, the company’s total sales might hit $9 billion—$6 billion from tickets and $3 billion from 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 can drop as new capacity isn’t really needed, the company might be able to generate $600 million in free cash flow annually. That is about three times the cash-generating potential of prior, prepandemic years.
With $600 million in free cash flow, the stock’s free-cash-flow yield works out to about 2.4%, based on recent prices. That yield makes the stock look expensive, but not completely unreasonable. The S&P 500 index trades for about a 3.4% free-cash-flow yield; other consumer-discretionary stocks in the S&P trade at a free-cash-flow yield of about 3.1%.
While that may offer a faint glimmer of hope for fundamental investors, there are problems with the $600 million free-cash-flow scenario. There are a lot of ifs and mights—and AMC has never generated cash flow like that in the past.
Consolidation in the industry is also no guarantee of success. AMC’s share of the market might rise, but there are still competitors: Regal Cinemas, now owned by Cineworld Group (CINE.UK), and Cinemark Holdings (CNK).
Neither one is trading like AMC: Cineworld stock is up 283% from its 52-week low, but is off 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 theater showings are shrinking, and the pandemic has accelerated that.
Wall Street doesn’t see the potential. Ten analysts cover the stock, and the average price target is $5.25. The highest is $18 a share. Before the pandemic, the average analyst price target was $15. There were fewer shares of AMC at the time. The old target prices implied an enterprise value of roughly $7 billion—a far cry from $35 billion.
Analysts do, however, have positive free cash flow projected for AMC in the future—about $13 million in 2022 and $90 million in 2023.
At these levels, the fundamental case for AMC stock is, to put it mildly, a stretch. Yet overvaluation alone is never a good reason to sell a stock short, betting on a price decline. High numbers of shares shorted are typically an element in the meme-fueled rises. These days, the risk of short squeezes has become far larger than the potential gain from the market realizing that a stock is too expensive.
In the end, investing and trading are different skills. Both can make people money. The important thing is not to confuse the two.
AMC investors may understand that. “I think that for most of the retail investors that you see buying quote-unquote meme stocks, it really is to prove a point,” says Natalie Camacho, a 27-year-old writer from California’s San Fernando Valley.
She says she bought 11 shares of AMC in January for $100 as the meme-stock wave began to build. She expected the company to benefit by the reopening from Covid-19.
Camacho says that she had felt as if the world of investing was closed to her, because she didn’t have $10,000 to put into stocks. On social media, the AMC trade has been portrayed as a battle of the little guys against the big Wall Street firms, which appeals to her.
“What draws me to it is that communal sense, that we’re all in this together,” she says. “There’s a sense that if we pool our money together, we might not be rich, but we’ll have enough to make a difference.”
Regardless of how it plays out, she is betting with money she can afford to lose. As of Thursday morning, her $100 investment had grown to $460. “Maybe it’s a long-term bad idea, but for now we’re holding,” she says.
Write to Al Root at [email protected], Connor Smith at [email protected], or Avi Salzman at [email protected]
