Interactive Investor

AMC Entertainment: what could happen to this volatile Reddit stock

14th July 2021 09:44

Rodney Hobson from interactive investor

The US cinema chain, one of the so-called Reddit stocks, had risen 3,500% in 2021. This is what our overseas expert thinks of prospects.    

Cinemagoers have flocked back to cinemas in relief at the easing of lockdown restrictions, but one smash-hit film does not make a cinema bonanza. Shares in AMC Entertainment (NYSE:AMC) are sliding alarmingly after racing away to unrealistic levels. Investors need to exercise extreme care.

Twice in three weekends, AMC, which specialises in plush cinemas with recliner seats, bars and diners, broke its post-Covid attendance records as 3.2 million people watched movies at its cinemas in the US, Europe and the Middle East between Thursday 8 July and Sunday 11 July. AMC owned eight of the 10 busiest cinemas in the US when Black Widow took film-starved audiences by storm, with box office takings hitting a post-pandemic record of $80 million. 

However, worries about being in an enclosed space with hundreds of potential Covid-19 carriers, and the aversion to wearing masks throughout a performance – compulsory in some countries and US states and encouraged in others – mean that attendances are likely to stay for some time well below the levels recorded two years ago.

AMC failed to turn a profit even in the halcyon days of 2019, when it made a loss of $149 million. Given that the pandemic has held up the production of new films, we could be waiting for some time for more blockbusters to filter through to accompany the oft-delayed latest James Bond offering.

It is true that the cinema has been written off before. Its death knell has been sounded over the past few decades by the spread of bingo halls and the multiplying of television channels, but the idea of a good night out at the movies has kept bouncing back from the dead. Old films on TV proved no substitute for up-to-date entertainment.

Live streaming services such as Netflix (NASDAQ:NFLX), though, offer a serious threat, especially after nearly two decades of stagnating cinema attendances and box office takings.

There were fears last year that AMC, with many of its cinemas closed, would file for Chapter 11 bankruptcy protection, as income slumped and debt levels at more than $5 billion proved difficult to service. In the event, retail investors, egged on in part by the Reddit social network website - which also puffed GameStop (NYSE:GME) shares earlier this year - piled in, driving the stock up to levels at which AMC could issue more equity at favourable prices to provide much needed finance.

Management has indicated that AMC needs to attract audiences of at least 90% of the levels enjoyed two years ago to break even. That looks an ambitious target. It is even harder to see where profits are going to come from to ever pay a dividend or finance expansion. It could be the shareholders who do the stumping up through a rights issue.

Source: interactive investor. Past performance is not a guide to future performance

AMC shares lost 90% of their value between September 2018 and the end of 2020 to stand at only $2, before racing away to the dizzy heights of $60 last month. History may be repeating itself, as the stock has now lost a third of its recent peak and is falling rapidly.

Short sellers have pounced on the stock as being overvalued and they may well be right. Those who sell stock they do not own with the intention of buying back at a lower level do not create weakness in a company, they simply take advantage of existing weaknesses. 

Hobson’s choice: If you have bought AMC shares already, you might be wise to take profits while you still can – or cut your losses and learn from experience. If you believe in AMC despite all the negative points, it might be worth waiting until the stock stops falling before you risk your money. The bottom could well be in single figures. Who knows? 

Cinemagoers may prefer to look at Walt Disney (NYSE:DIS), the distributor of Black Widow, although its shares look fully valued for now. Its wide portfolio, including theme parks, streaming services, retail outlets and TV production studios offer better hopes of recovery from the pandemic.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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