skip to Main Content
Get your free newsletter: Actionable insight each morning for self-directed investors. 

Investors interested in determining what the future holds for AMC Entertainment (NYSE: AMC) might be best served by looking to the past. In the 1950s drive-in movie theaters were all the rage, but today they have become a relic with just over 300 remaining in existence, none of which are very profitable. While AMC is not necessarily destined to go the way of drive-ins, the company appears to be on a similar trajectory and many industry observers believe now would be a good time to sell the stock.

In the 102 years since AMC was founded movies have transitioned, from celluloid films accompanied by organs to digital images and soundtracks delivered through liquid crystal display projectors and high-tech surround sound. Unfortunately for AMC Entertainment the same technological advancements that have made the experience of watching movies so much more sophisticated and elaborate have created a major shift in consumer behaviour when it comes to the way people access entertainment.

Add to that the seemingly-endless COVID 19 pandemic, and AMC’s management faces an uphill battle — particularly as consumers become increasingly comfortable turning to cheaper and more convenient ways of accessing entertainment such as the countless streaming platforms now in existence.

“What investors often fail to understand is that a good product does not necessarily mean something is a good investment. One can really enjoy going to the movies, but that doesn’t mean you should invest in movie theaters,” said Robert R. Johnson, a professor of finance at Heider College of Business, Creighton University. “The entertainment space is extremely crowded and AMC has no natural moat to protect itself against competitors that include the ever-expanding streaming services,” he said, noting that AMC’s biggest challenge is that it doesn’t really have a long-term, sustainable business model that is profitable.

Adds Lars Koch, an analyst and finance specialist at Kredit Finance, an agency that helps businesses find funding: “AMC is in an unstable state… AMC has had a difficult time gaining back their pre-pandemic revenue level, and rebounding may be a lot more difficult as time passes and people get used to living without theaters.” In fact, he believes that investing in AMC is a financially questionable decision.

A quick look at the AMC Entertainment financials

In its recent first quarter earnings announcement, AMC reported revenue of $786 million, a major improvement from the same period a year ago when it reported revenue of only $148 million, but still nowhere near enough to take the company into profitability. AMC continues to lose money, down $337 million for the first quarter of 2022, ended March 31, compared with a $567 million loss for the same period a year ago.

And while the numbers may look promising at face value, it is important to remember that a year ago most people were still afraid to leave their houses, while the current numbers reflect a period during which a large majority of Americans have been vaccinated and boosted and many people are once again comfortable engaging in public activities.

It is also important not to overlook the fact that movie attendance was already significantly declining before anyone ever heard the word COVID.

“We have to remember the situation before COVID, when visiting a movie theatre had been in decline for a significant period due to the rise in popularity of streaming services such as Netflix,” said Sam Boughedda, a senior analyst and news editor for AskTraders, noting that there was even talk of films bypassing theaters and being directly released to streaming services. Given AMC’s debt levels and lack of profitability, he believes “it is hard to argue that investors should be putting their money into the stock…. AMC has a deteriorating business model, and recent investments outside of the movie industry, including nearly $28 million in a mining company, Hycroft Mining, are yet to provide any positives for investors.”

Bridgewater Associates buying stock

While many retail investors may be disappointed with where AMC’s is currently trading — the stock closed at $12.90 in its most recent day of trading on May 17, down 82% from its 52-week high of $72.62, Johnson notes that investors need to remember that the stock was already unprofitable even before the pandemic, and that its inflated price had nothing to do with tangible metrics.

“What drove AMC’s stock price to ridiculous heights was a narrative that retail investors (the Reddit mob) could beat the evil hedge funds who were shorting the stock. That proved to be a profitable short-term trade, but that didn’t mean that AMC’s business fundamentals justified its lofty stock price,” said Johnson, who previously served as deputy CEO of the CFA Institute.

Investors should also be aware that executives at AMC have sold millions of dollars of stock over the past year, taking advantage of that boost from retail traders set on keeping the stock trading up. Meanwhile, the company has debt of roughly $5.5 billion. Still, not everyone is betting against AMC. News recently broke that Bridgewater Associates, the world’s largest hedge fund firm, bought roughly 27,000 shares of AMC’s stock in the first quarter.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Britt Tunick

Britt Erica Tunick

Britt Erica Tunick is an award-winning US-based writer with in-depth experience writing about the alternative investment industry and virtually every aspect of finance. She has spent more than two decades writing extensively about finance, most recently as a senior writer for AR Magazine (Absolute Return & Alpha), where she wrote cover stories and in-depth profiles on many of the hedge fund industry's biggest and most influential firms, as well as comprehensive features on a range of topics pertinent to the alternative investment industry.

Stocks in Focus

Here are some of the smaller companies we are following most closely. They all represent significant growth stories in our view. Our in-depth reports go into more detail on why we like them.

Comments

Subscribe for more stories like this, 8am weekdays - for free!


Get your free daily newsletter: 

Thanks to our Partners

Our partners are established, regulated businesses and we are grateful for their support.

Pepperstone
FP Markets
IG
Spreadex
WisdomTree
ActivTrades
Back To Top