Is AMC’s stock an overpriced flop or a must-watch?

AMC’s [AMC] stock had a far from blockbuster January. Heavily flopping, anyone expecting a sequel to last year’s Reddit-fuelled gains may be disappointed. The cinema chain is heavily indebted and its stock has been described as overvalued - a problem in the current market for a poster child for 2021’s meme stock craze.

Still, there are some tailwinds that could draw investors back to AMC’s stock - not least big budget films exclusively back at the cinema. And having amassed a war chest worth a couple of billion dollars off the back of share sales won’t hurt AMC’s cause.

How much room could there be left in the AMC stock, which exploded last year only to crash back down to earth? Will its debt pile continue to weigh or is the stock viable as a long-term investment?

AMC’s stock sees less than blockbuster returns

Meme stocks have had a poor start to 2022. AMC’s stock is down almost 46% the past month (as of 28 January), while Gamestop’s [GME] stock has tanked 33%. Last year these stocks were propelled by momentum trading as online forums - notably Reddit’s WallStreetBets - hypied them even if the underlying company fundamentals said otherwise. But in an environment where the Fed is likely to hike interest rates multiple times this year traders are ditching highly valued growth stocks. 

"We've seen seven weeks of pretty indiscriminate selling in most of the speculative spaces, and meme stocks live in that neighborhood," Art Hogan, chief market strategist at National Securities, told CBS MoneyWatch when discussing AMC. Hogan added that "Like all manias, they tend to have a shelf life,"

Over the 12-month period, AMC’s stock might be up over 13% but without something like the frenzy seen last summer, it might struggle to get back to the $72 plus high it hit on 2 June last year - even if that high was extremely short-lived. Since that point, AMC’s stock is down almost 76%, closing Friday at $15.06, with anyone buying at the top of last year’s trading being well and truly burnt.

A warchest with a blockbuster $2bn budget

At the start of 2021 AMC needed cash to starve off having to file for bankruptcy protection owing to a $5bn debt pile.  Then came the retail investing boom with new to the market traders using apps like Robinhood [HOOD] to pile into AMC’s stock. These traders quickly became the majority stakeholders in the company and allowed the cinema chain to raise $2bn in cash, raised mostly from stock sales.

The cinema chain could use this windfall that the chain could use to upgrade cinemas or pay down its debt - AMC has around $1.7bn in current liabilities along with $5.5bn in corporate borrowing, according to third quarter filings.

However, the second half of 2021 wasn’t as boombastic as the first. There has been disquiet over management selling its stock - CEO Adam Aron unloaded more than $40m worth of shares in November. Investors have taken note.

“The share price decline appears to be primarily related to shareholders who defected after management offloaded shares over the past two months,” said Alicia Reese, analyst at Wedbush, according to CNBC.

“The share price decline appears to be primarily related to shareholders who defected after management offloaded shares over the past two months” - Wedbush's Alicia Reese

What could move AMC’s stock

Weighing on the stock is the cinema chain's attempts to refinance its debt. CEO Adam Aron has marked addressing it as a key strategic goal for 2022. Aside from using its warchest, this could involve selling more stock, which would dilute the share price further, or look at renegotiating with creditors to improve interest rates.

Whether audiences are prepared to go back to the cinema is another consideration. Things are certainly improving from the height of the pandemic. Spider-Man: No Way Home opened to $260m in its opening weekend at the US box office over - the second highest domestic opening ever.

Comscore has projected that the North American box office would hit $4.4bn in 2021, double the previous year, even if it’s still well off pre-pandemic 2019 levels. In Europe, the Middle East and Africa,  cinema chain UNIC is forecasting revenues will grow 75% year-on-year to hit $7.8bn, according to The Hollywood Reporter.

Admittedly older audiences have been slower to return to the box office - one of the reasons for Steven Spielberg’s West Side Story remake flopping - and distributors are likely to change how they release movies, including shortening the time between when a film hits the cinema and when it can be streamed. Both could affect AMC’s business.

Where next

November saw AMC’s stock get lumped with a couple of notable downgrades from analysts. Michael Pacher at Wedbush downgraded AMC from Neutral to Underperform. The analyst said that the majority retail ownership will eventually ‘cash out and move on’. Pacher has a $7.50 price target on the stock, which he said ‘generously’ values the company at the top end of its pre-covid levels.

Over at Citi, Jason Bazinet upped his price target on AMC stock from $5 to $6 in November, while keeping his Sell rating. At the time AMC’s stock was trading at a $30 to $40 range, a level described as overvalued.

Seeing that those price targets are still a way below Friday’s close, there still could be some downside risk to AMC’s stock. Analysts tracking AMC  on Yahoo Finance have a $10.45 price target on the stock - representing a 30% downside.