There are a handful of stocks guaranteed to spark heated debates in any room full of investors. AMC Entertainment Holdings (AMC -6.39%) is one of them.
The multiplex operator has been booming since the beginning of last year. Are you optimistic? Are you bearish? Let’s look at three reasons why you might want to buy shares of the world’s largest exponent — and at least one strong case for selling the meme stock.
3 reasons to buy AMC
Let’s start with the obvious bullish feather in AMC’s cap. People are finally starting to come back to the movies. Primordialit is (PARA -2.00%) Top Gun: Maverick broke national box office records for Memorial Day weekend. A big problem for the industry so far – one that explains why box office receipts are down 42% year-to-date compared to 2019 – is that blockbuster films have been rare. Throughout 2020 and 2021, studios have been reluctant to pitch their blockbuster contestants because the pandemic has made it too difficult to draw crowds to theaters. But Hollywood is going all out this summer.
You’ll see a sequential decline at the box office this weekend, but it might not really be a decline given the rave reviews the Superior gun sequel receives reviews and audiences. And the lull will not last beyond a weekend. Expect Jurassic World: Domination set up huge ticket sales next weekend. Light year — the toy story spinoff – will attract young families to the local multiplex the following weekend. This Light year Opening weekend is expected to be huge, as it will feature three blockbusters, all of which will be in theaters for three weeks or less.
The second reason to buy AMC stock now is for the company to gain market share. There are many reasons why it’s even more of a force in its industry than it was before the pandemic-related shutdown. Its emergence as a meme stock has helped – 4 million retail investors are actively talking about the brand. It also helps that AMC kept its theaters open when rival Regal closed for a second time in late 2020 following the theatrical release of the latest James Bond movie, no time to die, bumped. Smaller players who lack AMC’s financial resources have also faltered, and AMC is slowly and selectively adding some of these rival theaters to its portfolio.
The third reason to buy this stock now is that per capita spending is strong among moviegoers who come to its multiplexes. Apparently, the journey from the living room couch to the movie theater also makes many people hungry for the buttery hot popcorn, drinks, and snacks sold at the concession stand. AMC also made its own luck during the box office lull by increasing mobile orders across the chain. Consolidated food and beverage revenue per customer is 40% higher than it was in 2019. This is a big deal since the concession stand is the main profit center for exhibitors. The majority of revenue from ticket sales of a new release goes to movie studios, but those high-margin food and drink sales belong solely to AMC.
A reason to sell
The main reason for the red flag when it comes to AMC as an investment is its dilution. Through secondary stock offerings, management has quintupled its number of shares outstanding since the start of the pandemic, and most of those shares were sold by the company during the darkest times of the COVID pandemic. -19 at the start of 2020, at prices much lower than the prevailing ones. today.
This dilution stings in two ways. The not-so-obvious way is that it gets in the way of short presses. There are approximately 109 million AMC Entertainment shares reported as sold short at this time. If that had been the case three years ago – when AMC had 103.8 million fully diluted shares outstanding – its short position would have been over 100%. With 515.9 million shares currently outstanding, short interest is approximately 21%. It’s still high, but there’s a lot of float to get through in a squeeze.
The obvious reason why this massive dilution hurts shareholders is that each share is now a fifth of what it was before the pandemic. Let’s dive deeper into the calculations. The $785.7 million in revenue AMC generated in the first three months of this year is 35% lower than the $1.2 billion it generated in the first quarter of 2019. However, divide those revenue numbers by fully diluted share count, and you’ll see earnings per share fell from $11.56 in Q1 2019 to $1.52 in Q1 2022, a decline of 87%. You will see the same problem arise in the price-earnings ratio when AMC finally returns to profitability.
Are bullish catalysts enough to outweigh dilution-related valuation concerns? The long-term outlook is going to be tough, but I think there will be too many positive headlines about the film industry’s turnaround this summer to sustain this exponent’s stock for long.