AMC Entertainment‘s (NYSE: AMC) stock caught the attention of Reddit group WallStreetBets this year. Starting in 2021 at around $ 2, the price rose to over $ 20 by the end of January. At present level, it’s still about six times he started the year.
Despite the day traders ” enthusiasm, there are good reasons not to buy into the hype. Let’s explore them.
More options for watching movies
Fortunately, COVID-19 vaccines are being rolled out, which will hopefully bring a sense of normalcy back to the world. As the number of cases decreases, governments allow theaters to reopen. This includes New York City, where authorities have allowed them to operate at 25% of their capacity.
But I’m skeptical of how much this will help AMC’s results. Admittedly, 2020 has been a difficult year due to the pandemic. Revenue fell more than 77% to $ 1.2 billion and AMC’s loss widened to $ 4.6 billion from $ 149.1 million.
However, the virus has accelerated underlying trends that have plagued the industry for some time. In 2019, before the pandemic affecting the film industry, AMC’s revenue was $ 5.5 billion, stable from the period a year earlier. However, with faltering attendance, its admission revenue fell 2.5% to $ 3.3 billion.
While this year will undoubtedly draw more people to theaters, causing a rebound in revenues, AMC still faces some major challenges in the long term. Indeed, more and more filmmakers are releasing films even faster on streaming and on-demand premium services. These companies had already shortened the time between theatrical release and when people could watch a movie at home.
AT&TThe Warner Brothers division of Warner has announced that it will simultaneously release all of its films slated for 2021 in theaters and on its HBO Max streaming services. Walt disney is mixing of theatrical releases by putting films directly on its Disney + service, but with an additional charge for watching films early.
In any case, the window between when a movie appears in theaters exclusively and when it becomes available for streaming and other home services is narrowing. This offers more options to look at which is great for consumers. However, it’s more difficult for movie companies like AMC to get moviegoers in the door.
A lot of debt
Management has proven adept at preventing bankruptcy, escaping several times over the past year. Most recently, AMC raised $ 917 million by issuing debt and equity in January, a step that CEO Adam Aron said puts discussion of an impending bankruptcy “off the table.”
However, I wouldn’t be too excited given the heavy debt load. At the end of the year, AMC’s debt stood at $ 5.8 billion, up almost $ 1 billion from 2019. It had $ 308.3 million in cash. at the end of 2020. During that time, its operating cash flow was – $ 1.1 billion.
Not a good combination
If you are considering making an investment in shares of AMC, I advise you to reconsider. With competing ways to watch new movies sooner and a lot of debt, the combination will likely leave you with buyer’s remorse.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.