AMC Entertainment (NYSE:AMC) has become famous for its “meme stock” presence. In other words, AMC stock and others have become the go-to short-squeeze names and have become well-known favorites among Reddit traders.
Earlier this year, we saw an incredible development. Massive short-squeezes across the board had algos, retail traders and others looking to bid up stocks with high short-interest measures.
AMC stock was a key component in this event, although management already had the idea to raise capital. In a way, it sort of put an early end to the madness — at least for AMC — but it was the smart and prudent thing to do.
It wasn’t really AMC Entertainment’s fault that it ended up in the liquidity pickle it’s in. The novel coronavirus shut down many indoor activities and seeing a movie in a packed theater is not exactly a safe pandemic practice.
That said, we’re not looking to chase the stock out of sympathy.
Breaking Down AMC Stock
It was very wise for the company to raise capital. In fact, it did so more than once.
The company raised over $900 million in late January, then sold another 43 million shares to raise over $425 million in April. It was something the company had to do.
Raising this capital ensures that AMC will be able to continue operations and wait out the pandemic. Even though the U.S. is vaccinating at an impressive rate and the population is eager for a “return to normal,” we’re not fully there yet.
Further, just as we’ve seen a disruption in the global supply chain, we’ve also seen a disruption in the movie supply chain. Big content houses shelved their new releases last year because of the pandemic. They also put projects on hold and pulled in on spending (which makes sense, given that new releases were being delayed).
All of this will work its way into the theater business, impacting AMC Entertainment.
I have no doubt that AMC and other theaters have pent up demand. That even shows up in analysts’ estimates. Consensus expectations call for more than 90% revenue growth this year and next year.
Despite back-to-back years of torrid growth, that would only give AMC revenue of $4.8 billion in 2022. That’s still shy of the approximately $5.46 billion it averaged in the two prior years before the pandemic (2018 and 2019).
Further, analysts still expect losses in each of the next two years. This year’s estimate currently sits at a loss of $3.25 a share. Next year calls for a loss of nearly $1 per share. Not to kick AMC when it’s down, but the company lost more than $4.5 billion in 2020.
Where Does That Leave Us?
Again, I’m not trying to kick this company while it’s down. I don’t really see it as being AMC’s fault. A global pandemic shut down the world — there’s not much a business like this can do.
It made the right moves to survive by raising capital. However, we’re not looking to invest in survivors. That may fit some investors’ agenda, but it doesn’t fit ours. Instead of survivors, we want “thrivers.”
AMC has simply incurred too large of losses and is forecast to continue losing in the intermediate future. Its recovery in revenue is a positive sign, but being below pre-pandemic years is discouraging.
While completely necessary, the company’s capital raises does put a strain on the balance sheet and dilute investors. Although it was necessary to avoid a liquidity situation it puts it in a tougher position over the long term. This isn’t unlike cruise operators or others that were hit hard during the pandemic.
When we look at the charts, AMC stock has had a very nice run lately. However, it would be wise to take profits into that move and avoid this name going forward.
The stock may or may not push through the 61.8% retracement and the March high. But either way, it has enjoyed a nice run and it’s a perfect time to exit if you’ve been long from lower. Use the dip in other high-quality stocks to roll the profits to.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (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.
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