The world’s largest cinema chain, AMC Entertainment (NYSE:AMC) saw its share price decimated in the March 2020 market crash. By the turn of this year, AMC hit a 52-week low of $1.91 a share and bankruptcy rumours were circulating. Short sellers began upping their game. But it was then picked up in January’s GameStop (NYSE:GME) frenzy as a favourite of Reddit investors. This led to the stock reaching a 52-week-high above $20 a share. But today it’s less than half that at around $9.90.
Wall Street analysts are increasingly bearish on AMC stock as the future outlook for cinema going looks less than bright. Will they be proved wrong by the collective power of the Reddit army?
Reasons to be bullish on AMC
The Kansas-based company was founded back in 1920, so at 101 years old it can be considered well-established.
At the end of 2020 it featured in several major investment portfolios including Vanguard, BlackRock, Susquehanna, and Charles Schwab. Whether this is still the case remains to be seen.
AMC has around 1000 theatres and 10,700 screens. 600 of these are in the US and all should be open by the end of April. Its remaining 400 locations internationally should reopen by May.
Dalian Wanda defeated
Its major shareholder Dalian Wanda Group recently sold off its majority holding, greatly reducing its equity from nearly 60% in December to around 6.8% in April. It appears that Dalian Wanda was forced to sell to deal with its $5.7bn maturing debt bill, amounting to 36% of its total outstanding notes.
Prior to the pandemic, the Chinese powerhouse had already borrowed billions to fund overseas acquisitions. Being that most of its empire covers entertainment, real-estate, malls, theme parks, sporting entities and movie theatres, the pandemic hit hard.
Dalian Wanda bought AMC for $2.6 billion back in 2012.
This news initially delighted Reddit’s WallStreetBets traders. That’s because control of the company essentially passed to remaining shareholders, many of whom are retail investors such as the Reddit crew. But the elation wore off and after a brief share price rise, it sank again as Wanda pared back its stake even further.
Reasons to be bearish
AMC’s full-year revenue for 2020 came in at $1.2 billion. That’s a far cry from its 2019 revenue of $5.4 billion. But in addition to this, the company secured nearly $1.3 billion in new debt financing between April 2020 and February 2021. It also raised additional equity offerings further diluting shares. It’s planning another in the near future for a further 500 million shares.
Each time the shares are diluted the value to shareholders is too.
Nevertheless, while the company is requesting shareholders approve the 500 million new shares, the CEO has pledged not to issue a single one of those shares in the 2021 calendar year. He pointed out that 43 million shares authorized in 2013 could be used to access short term capital if necessary.
Many shareholders are wary of this logic and keen to vote ‘no’ to the new issuance, for fear of further dilution.
Tough times ahead
Movie theatres throughout the United States are now allowed to reopen and resume operations. Unfortunately, this is at reduced capacity so it will take time to get revenues rolling in at pre-pandemic levels.
There are also two other main problems. The rise of streaming has made watching on demand a part of everyday life at home. It’s cheaper than visiting the cinema and more convenient. When people get the chance to go back out and socialise will more screen time really be top of their list of things to do?
Then there’s the lack of content. The pandemic put filming on hold so there’s not much to entice viewers back to the big screen in the coming months either.
Godzilla vs Kong brought in $48.5 million in its first five days last month, but there are no other big releases expected before the summer. Nevertheless, two of these Cruella and Black Widow, are from Disney (NYSE:DIS), and viewers will have the option to stream on Disney+ rather than going to the theatre.
The average Wall Street analyst price target comes in around $4.40. On January 2, 2020 before the pandemic hit, the AMC share price was just above $7 with a much brighter future ahead. For it to be at nearly $10 today with so much more debt and uncertainty really doesn’t make much investment sense.