As vaccinations levels reach the point where masks are no longer mandatory for vaccinated individuals in several parts of the U.S., many movie theaters that have been dark since the start of the COVID-19 pandemic have already re-opened or are gearing up to do so.
But while Hollywood is coming out the gates in a strong way with big ticket films such as Cruella and A Quiet Place Part II in the hopes of attracting large audiences, it doesn’t necessarily mean the long-term prospects for stocks such as AMC Entertainment (NYSE: AMC) are positive.
AMC Entertainment: two major challenges facing the stock
Despite social distancing beginning to wane in many parts of the U.S. and excitement about businesses such as theaters beginning to re-open, AMC faces two major challenges. The first is ongoing skepticism among many people about returning to crowded places where there is no guarantee that people who are not vaccinated will wear a mask. The second, and likely bigger hurdle, is the reality that the past 16 months may have permanently altered many consumers’ movie viewing preferences to a point where watching films on-demand in the comfort of their own homes has become their new norm.
“The rise of home entertainment significantly cuts into the movie theater profit margins. Hollywood movies used to have a monopoly on production value, but ever since The Sopranos, more and more television series are competing on production quality. Home entertainment systems have also vastly improved in quality particularly with audio,” said Asher Rogovy, chief investment officer of investment advisory firm Magnifina. “AMC and other movie theaters, such as Cinemark Holdings and IMAX Corporation, will have to innovate in order to justify higher stock valuations. Despite home entertainment, movie theaters remain a common date venue and leisure activity for minors,” he said, noting that AMC could potentially use its elevated valuation to raise capital to develop new ancillary services, but that it could also face additional competition on this front if other “meme stocks” such as GameStop use their enhanced value to invest in digital entertainment innovation that competes for the same consumer dollars.
Still a meme stock for many investors – and Mudrick Capital
In recent days, AMC has seen its stock once again surge from around the $10 mark in early May, to as high as $72.62 on June 2nd. Most recently, the stock closed at $49.34 on June 9th, opening back up at $47.93 today (Thursday) and experiencing an early morning pop as high as $51.45.
The pop in the stock’s price, which has once again been driven by enthusiasm among retail investors, is one that both the company and several of its executives have been quick to take advantage of. On June 1st, AMC raised $230 million through the sale of 8.5 million shares of its stock to hedge fund firm Mudrick Capital at $27.12 per share – money the company has earmarked for the acquisition new theater leases, specifically locations previously operated by Arclight Cinemas and Pacific Theatres, along with investments in its existing theater locations.
Mudrick Capital flipped the shares it acquired the very same day, netting the hedge fund a quick profit, though not as much as it could have gotten had it just held out until the following day when AMC board members sold close to $4 million worth of the company’s stock, following on from other significant sales among AMC insiders in previous days.
“AMC Entertainment has seen massive renewed interest from day traders and seasoned investors alike over the past weeks. What supposedly started as a vigilante effort on behalf of these traders quickly turned into hope and optimism for the future of the struggling cinema chain,” said Phillip Neighbour, chief operating officer of UK-based international communication and information technology company PlayBox Technology. “The introduction of their ‘Investor Connect’ program is also helping to strengthen their relationship with investors, offering free popcorn and ‘special screenings’ to those who choose to hold shares in the company.”
Though he acknowledges that AMC could face an uphill battle in its efforts to lure people away from home streaming of movies, he believes that the in-person movie experience will remain a mainstay. “People aren’t going to the movie theater for convenience. The popcorn, the atmosphere, the comfort, the trailers – it all forms part of that experience that, until now, has proved to be timeless. As we emerge from the COVID-19 pandemic, expect to see movie theater chains like AMC working to maximize that experiential aspect for customers. Themed screenings, more premium options and overall public sympathy for the struggling film industry is likely to see cinemas bounce back in a big way.”
For now, however, it seems the main driver of AMC’s stock price is its popularity as a “meme stock” among retail investors on Reddit. Given this reality, the U.S. Securities and Exchange Commission announced on Monday that it will be closely watching trading of AMC and GameStop Corp. for any potential trading manipulation or other misconduct and is prepared to act on any such violations.