The Ape Show Has Ended in AMC Stock, Reality Finally Sets In

Mohit Oberoi, CFA - Author

Aug. 4 2021, Published 9:27 a.m. ET

AMC Entertainment (AMC) stock fell 4.5 percent on Aug. 3 and was trading lower in the premarket on Aug. 4. The stock is down 33 percent over the last month and has been in a freefall since hitting its all-time highs. Why is AMC stock falling again and should you buy or sell now?

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AMC stock was the poster child of meme stocks. Wall Street pros watched in disbelief as the stock soared way higher than analysts thought it should. The short squeeze was too hot for several hedge funds. They lost heavily betting against the cinema chain company. However, the tide is now turning and AMC stock has fallen hard from its peaks.

Why is AMC stock falling today?

There isn't a particular reason why AMC stock is falling on Aug. 4 or why it has fallen over the last month. We can attribute the fall to the sell-off in outdoor stocks amid rising coronavirus cases. However, there hasn’t been a commensurate sell-off in other outdoor entertainment and leisure names like we’ve seen with AMC.

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Since the rally in AMC stock was built on thin air, it has faded. Markets and several retail traders now seem to realize that AMC is a cinema chain company that’s trying to protect itself from streaming companies.

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If anything, the streaming war has intensified over the last year amid the digital transformation. While streaming won't really kill moviegoing, it will certainly lead to demand displacement. Some of the moviegoers would find the ease and comfort of streaming a better proposition over the movie-going experience.

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Are the Apes winning or losing badly?

A large number of traders who choose to call themselves “Apes” see AMC as the next big thing and their target prices can be as wild as $100 –$1,000. When AMC stock was going up, Apes seemed to be winning the argument. However, the reality is fast catching up with AMC as well as some of the other Reddit names with questionable fundamentals.

Talking of AMC Entertainment, the business has been marred by steep losses as well as cash burn over the last several quarters. The company’s earnings release later in August will offer insights on the latest financial position and the projected cash burn in the back half of the year.

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Should you buy or sell AMC stock now?

AMC Entertainment has a market cap of over $17 billion and another $11 billion and liabilities. The company has a negative book value per share. While I wouldn’t harp much on the negative book value of equity, the earnings-based valuations also don’t seem to support the current valuations.

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AMC posted annual revenues in the ballpark of $5.5 billion before the COVID-19 pandemic. Even if the company reverts to pre-pandemic revenues, we’ll get a price-to-sales multiple of over 3x. As for profitability, cinema chains struggle with making profits and have a high operating and financial leverage.

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Even if AMC manages a net profit margin of 10 percent, which it hasn’t done in any full year since its listing, it would post a net income of $550 million, which would still mean a PE multiple of almost 31x. Even after assuming generous margins and revenues, the multiples just look too high.

On a lighter note, AMC will lose some revenues from popcorn sales. The company is giving free popcorn to shareholders. In good times, such news was cheered by AMC’s retail shareholders.


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