Investors haven’t been deterred by the fact that AMC is still losing money, bleeding cash and facing a mountain of debt plus heavy competition, leading some analysts to liken it to the dot-com craze of 20 years ago – on steroids.
By Matt Turner and Paul JarvisBloomberg
True to form, AMC Entertainment Holdings Inc. ended its wild week with another day of moves that confounded anyone trying to explain them.
The new king of meme stocks bounced between gains and losses, closing 6.7% lower at $47.91 on Friday. It’s still up 83% on the week, adding to May’s 160% surge.
It’s been quite a ride for AMC, with the stock’s surge enabling the world’s biggest movie-theater chain to sell equity and shore up its shaky balance sheet. On the brink of bankruptcy only a few months ago, the company is now the darling of retail traders, with this year’s 2,200% gain ranking as the most of any stock in the Russell 3000 Index. GameStop Corp., which started the meme-stock craze back in January, is a distant second with an advance of about 1,300%.
“When does the bubble pop? I don’t know,” said Eric Handler, entertainment analyst at MKM Partners, who has a $1 target for AMC shares and sees no link between the current price and what’s actually going on at the company. “I have no idea when fundamentals will matter again.”
Investors haven’t been deterred by the fact that AMC is still losing money, bleeding cash and facing a mountain of debt, as well as heavy competition.
It seems a lot like the dot-com craze of two decades ago to Edward Moya, senior market analyst at Oanda Corp., “but on steroids — the swings are greater and everything is happening in a much shorter time period,” he said. “What makes this trading environment crazier is that the retail trader has a better chance to hold their own against the big boys, now that they have low costs and have coordinated moves targeted with only a handful of stocks.”
On Thursday, AMC tumbled 18% after disclosing plans to sell more stock. The company collected $587 million from the sale, which came just days after it netted $230.5 million by selling equity to Mudrick Capital Management. The company later said it is asking investors for permission to sell 25 million new shares in 2022, a 95% cut from a previous plan that was withdrawn because of shareholder opposition.
Chief Executive Officer Adam Aron told shareholders that AMC may face challenges or “exciting opportunities” post-pandemic and needs “precious shares” to issue if such a situation arises. The company also dismissed speculation of a stock split.
“AMC took the best possible path of action and used the bloated share price to raise lots of capital for its own purposes,” Joachim Klement, a strategist at Liberum, said by email. “Meme stock investors need the share price to be volatile and the stock to make headlines because if the attention disappears, so does their investment.”
The frenzied rally has pushed AMC shares to improbable levels. The company now has a market value of about $25 billion — bigger than 40% of the listings in the S&P 500 Index. “AMC is nowhere near worth what the market is currently pricing it at, and over time should be a lot lower,” said Michael Hewson, chief market analyst at CMC Markets. “How it gets there is anyone’s guess.”
Wedbush raised its price target to $7.50 from $6.50 on Friday, a level that implies an 84% plunge from the last close. Analyst Alicia Reese said the firm has made the best of its recent surge by selling shares to raise cash, but called its current price “out of touch with the company’s fundamentals.” She said the stock will see continued “significant” volatility and doesn’t recommend buying shares. The average analyst target is just $5.25.
AMC’s stock sales helped raise $1.25 billion in the second quarter, bringing its cash hoard to almost $2 billion, but this can take the cinema chain’s recovery only so far if audiences don’t come back in force. It still has to deal with pre-pandemic problems, such as competition from streaming and a crushing debt load, that helped produce losses in two out of three years preceding the Covid-19 outbreak.
Another chunk of cash may go to landlords, who want AMC to pay $470 million in back rent that it skipped while its theaters were closed. What’s more, the company backed away on Thursday from plans for a much bigger share sale in the face of fierce opposition from its army of retail investor.
This is “mitigating the risk of further dilution this year and likely appeasing retail investors, but also heightening the need for a strong box-office recovery,” Bloomberg Intelligence analyst Geetha Ranganathan said in a research note.
Aron told analysts during an earnings conference call in May that streaming isn’t the same thing as going to see a movie at big-screen theaters and raiding the concession stand.
“People have been so deprived of something that they love, people love going to the movies,” Aron said. “People want the whole enchilada.”