AMC’s Cash Burn Story Is Not Going to Have a Happy Ending

Stock Market

In a previous article, I highlighted how AMC Entertainment (NYSE:AMC) stock declined a whopping 13% on the same day a key catalyst in the form of Taylor Swift’s Eras Tour being brought to the big screen. In many respects, this price action may certainly be considered odd, in light of how staunch retail investor support has been for AMC stock in the past. 

Accordingly, with AMC appearing to have lost its meme stock status, investors appear to now be valuing this company on its fundamentals. In that regard, there’s much left to be desired when it comes to this theater chain.

Let’s dive into what investors should be focusing on when it comes to AMC right now.

Turbulence Is the Name of the Game for AMC

What a ride it’s been for AMC stock this year. Following a court ruling allowing the company to convert its preferred equity units to common stock, AMC stock has since declined around 80%. However, this stock has bounced roughly 35% from its September lows, suggesting that some traders who have taken long positions in the struggling theater chain may be coming out ahead.

This rise came as a result of some positive developments. AMC boosted cash reserves with a $325 million share issuance and formed a strategic partnership with Taylor Swift for a concert movie. This deal certainly has the potential to bring in significant profits. Furthermore, a recent deal ending a 5-month writers’ strike is expected to revive Hollywood productions and provide a substantial boost to the entertainment industry.

That said, if AMC shares dropped by 80%, they’d need a 400% increase to recover. In simpler terms, the stock would have to grow four times its value to break even.

Over the course of the year, AMC stock is still down nearly 70%. I think the company’s recent reverse split is worth paying attention to. Reverse splits can raise per-share prices but may signal financial challenges, leading to selling pressure and price drops. AMC’s reverse split may raise concerns about its financial health among investors, impacting its long-term outlook.

AMC’s Is Burning Cash Fast

AMC’s stock decline is due to its limited revenue growth and high debt load. The business model has been broken for years, predating the current CEO’s tenure.

Additionally, AMC faces a challenging future with declining sales, competition from alternative viewing, and a substantial debt load of over $4.8 billion. Its Q1 sales were 21% lower than pre-pandemic levels, indicating a tough road to recovery in an evolving industry.

In July, CEO Adam Aron emphasized the importance of AMC Entertainment’s ability to raise equity capital, despite a successful “Barbenheimer” at the box office and rising share prices. Aron’s concern is driven by potential delays due to strikes impacting scheduled movie releases in 2024 and 2025.

AMC faces a growing financial risk, potentially running out of cash or struggling to refinance its debt by 2024-2025. This risk is not to be underestimated as demonstrated by Cineworld’s bankruptcy. AMC’s retail investors have been hesitant to authorize new share issuances, and APEs (AMC Preferred Equity units) introduced by Aron as an alternative have lost value, hampering fundraising efforts.

Don’t Buy The Hype

AMC had a rare winning week, up nearly 16% by October 6. This boost comes after AMC’s shares fell over 85% in a year. The recent optimism stems from the announcement of Beyoncé’s film, “Renaissance,” premiering in North American theaters on Dec. 1.

However, it’s important to note that movie theaters operate on slim margins, generating income mainly from tickets, concessions and in-theater advertising. Just like InvestorPlace’s Will Ashworth noted, AMC stock’s decline is no secret. The company relies mainly on traditional movie exhibition for revenue, and its substantial debt won’t diminish without a sound business strategy.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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