The stock of AMC Entertainment Holdings (NYSE: AMC) is soaring, and with the re-inflation of the meme stock bubble, the stock has risen by a jaw-dropping 2850% so far this year. But long-term investors should think twice before joining this trend. AMC’s valuation is inconsistent with its poor fundamentals. The company may dilute equity holders to maintain their cash consumption and meet debt obligations.
AMC trades at a price of $59 per share and has a market value of $30.5 billion, which is approximately 68 times its revenue in the past 12 months. Investors may be optimistic about the company’s ability to rebound from the coronavirus pandemic, which has greatly reduced sales in 2020. But so far, the company’s fundamentals have not shown a strong recovery. Revenue in the first quarter fell 84% year-on-year to US$148.3 million, a slight improvement compared to the fourth quarter of 2020, when sales fell 89% year-on-year. The management made a heroic attempt to save the troubled business and reopened almost all US assets, which helped increase AMC’s market share from 26% to 33%.
However, if consumers do not go to the cinema, market share is meaningless, and this key factor is largely outside the control of management.
The studio just didn’t release enough expected content to get people back to the theater. Many people are establishing subscription video-on-demand (SVOD) businesses, such as Walt Disney’s Disney+ or Comcast’s NBCUniversal’s Peacock, as alternative distribution channels for new movies. AMC’s poor performance in the cinema industry and the uncertain future make its high valuation questionable.
AMC’s balance sheet is another red flag. The company reported cash and equivalents of US$813 million, and its operating loss in the first quarter was US$428 million. Shareholders are paying for this unsustainable cash consumption. As management issued new equity to maintain operations, the outstanding shares almost quadrupled from 104 million shares to 400 million shares.
Dilution is not free money. It reduces earnings per share (EPS), a metric that determines the company’s valuation and shareholders’ requirements for future profits. AMC’s excessively high share price gives management more incentive to use the capital market. In June, the company completed a US$587 million stock offering at a price of US$50.85 per share-the number of outstanding shares increased by 11.6 million shares. This move follows the sale of 8.5 million shares to Mudrick Capital at a price of US$231 million.
AMC’s debt burden is also worrying. The company reported US$5.4 billion in corporate borrowings and US$4.9 billion in long-term operating lease liabilities (deferred rents for certain properties). The debt burden will put pressure on cash flow through amortization and interest expenses (a total of $151 million in the first quarter).
The good news is that AMC’s high stock price makes bankruptcy unlikely in the short term. The company can issue new shares to maintain its loss-making business and repay debt, so the hype may continue in the short term. However, due to weak operating performance and continuous dilution, AMC’s long-term prospects look bleak. Don’t hold the bag when the music inevitably stops.