AMC Entertainment: Meme Stock Retreating, What to Do Now?

AMC Entertainment epitomizes the latest wave of the meme stock phenomenon. Now it is retreating. What to do now? Before we concern ourselves with the monster returns that we may be missing or enjoying, let’s first dial back to the good old fundamentals.

Industry and Financial Statement Details

First started looking at AMC (the movie theater chain) right before the pandemic as it was heading into stressed / distressed territories in early 2020. There were surprisingly quite a bit of nuances to the seemingly straight-forward business of movie theaters.. First, given the strong streaming backdrop, the industry box office (before pandemic of course) had been remarkably stable. Slow decline in attendance had been more than offset by slow increase in ticket prices. Second, the theatrical exclusive window continues to shrink. What would it mean to the industry going forward? Then, looking deeper into the financials, you would realize food and beverage is almost as important as ticket sales in terms of gross profit contribution. So great job on that!

More specific to AMC, you also have the exhibitor services agreement liabilities with National CineMedia, fairly large deferred revenue and income due to gift cards, subscriptions and loyalty program, and just generally lack of free cash flow generation for years even before 2020. And then pandemic hit. Since 1Q 2020, the company has been losing ~$100mm/month, for a total of $1.6bn for last 5 quarters (through 1Q 2021).

Stock Performance and Valuation

With the above backdrop, the stock actually rallied from ~$10 in May 2021 to over $60 in June 2021. As of the time of writing, the stock is at around low-to-mid $40s, giving the company a ~$25bn enterprise value. I am not sure any of the above factors matters anymore. In the best case scenario, let’s say the company gets back to 2019 earnings level of $750mm EBITDA. The current valuation implies a whopping 30+x multiple.

In 2Q 2021 so far, the company has raised total equity capital of $1.25bn, taking advantage of high stock price. There was a mention that the company was raising the equity for pursuit of value creating acquisitions of theater assets and leases. Just hope that they are not buying movie theaters at 30x multiple!

Historically, being the premier entertainment option for the masses, cinemas were valued and transacted at multiples ranging from high-single-digit to low-teens. In today’s world, given the challenging industry dynamics, I find it hard to ascribe anything higher than 6-7x. And adjusting for the much expanded share count and still high leverage, using the 2019 EBITDA, 6-7x would mean a $3 stock. Even at 10x, that’s $5/share. That would imply the current stock price could be 8-14x overvalued!

What To Do Then?

Should I be shorting the stock now? First, it’s expensive to short now. You have to put up decent amount of capital for collateral purposes. But in general I can only say I don’t short. Very unfavorable risk-reward. Case in point, over-valuation can last longer than you can last! Furthermore, the higher the stock goes, the more value the company can actually generate, for example by issuing equity and/or acquiring new assets. This is opposite to being long. When you are nursing with losses from shorts, they become a huge distraction. What about put options? It’s also fairly priced in due to the high volatility! Tempting on both counts but maybe I’ll leave it to the brave ones out there. To be continued..

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