AMC is the world’s largest movie chain. Not surprisingly, the COVID-19 pandemic drastically hurt its business and the company is struggling to stay afloat. Its predicaments is seen in the stock price over the past year. The stock fell from a high of $7.76 in February 2020 to a low of $2. Can AMC become a dramatic comeback story, or will it succumb to COVID lockdowns?
How is AMC staying afloat during the pandemic?
One question that’s top of mind for investors is how AMC is surviving during the pandemic with almost all of its theatres closed. The answer is lots of share dilution and debt raising. AMC’s outstanding class A shares went from just under 55 million shares in June 2020 to more than 200 million shares today (the company just filed to sell another 50 million shares earlier this month). Along with this, AMC’s long term debt grew by over $1B from Q4 2019 to Q3 2020 (9.74B to 10.8B). This debt comes with a hefty price. For example, a $500 million debt raise in April 2020 came from selling bonds with a 10.5% interest rate. A $100 million debt raise this month from Mudrick Capital Management came with a 15% interest rate.
The company is burning about $100 million a month. With the existing cash on its balance sheet, it needs $750 million more this year to stay afloat, assuming its theatres remain mostly closed. One should expect the company to continue diluting shares and raising debt.
- REOPENING COMEBACK STORY: The biggest bull case for AMC is a post-pandemic comeback story. This, of course, assumes that AMC can make it through the lockdowns. Despite being loaded with expensive debt, AMC will emerge from the pandemic as a much leaner company with a huge boost to revenue as the pent-up demand to do normal “outside” activities from stuck-at-home consumers is unleashed. Add to this the release of a large catalogue of films that were delayed due to the pandemic and you have the perfect environment for AMC to thrive. With the Pfizer and Moderna vaccines both out, and vaccination rates accelerating worldwide, it’s not unfathomable that large swathes of the worldwide economy will reopen later this year.
- WW84 RELEASE: Wonder Woman 1984 was released to theatres and HBO streaming at the same time in December 2020. Despite the ongoing pandemic, the film managed to pull off a $16.4 million box-office, performing better than expected. This demonstrates that even with at-home streaming options and an ongoing pandemic, people still value the experience of watching films on the big screen. Certainly a very good sign for post-pandemic movie-going demand.
- SHORT SQUEEZE POTENTIAL: With the company in such a tough predicament, it's no surprise that there's a high short interest for the stock. As of December 31st, 2020, there are more than 38 million shares sold short, an increase of more than 120% since August. The current investment climate, which has a large retail representation ever since the pandemic started, appears to favor distressed companies. Considering how Hertz's stock soared in June last year and how GameStop's stock is soaring now, it’s not a stretch to bet that investors will pick AMC for the next short squeeze. In fact, Google search interest for “AMC stock” and “AMC short squeeze” is starting to pick up. Even though the bump in stock price from retail investors hoping to short squeeze the stock is considered a short term effect, a company can benefit from this if it manages to sell stock at heightened prices.
- NEW COVID STRAINS AND INEFFECTIVE VACCINES: Several worrying COVID-19 mutations have been detected around the world. The most notable of which are the UK and South African strains. There are worrying signs that not only are the Pfizer and Moderna vaccines not as effective against the base strain as was originally thought, they are also ineffective against these new strains. A recent report from Israel stated that 6.6% of 189,000 vaccinated individuals still tested positive for COVID-19. Then there are reports of the Pfizer and Moderna vaccines being less effective against the South African strain, which is a worry echoed by Dr. Fauci. The reopening of much of the world’s economy rests on the speedy rollout and effectiveness of these vaccines and any hiccups in the process will drastically slow things down. This would be disastrous for AMC. The company’s current share dilution and debt raising plan allows it survive just one more year of lockdowns.
- SHARE DILUTION AND HEAVY DEBT: To prevent bankruptcy this year, AMC has undergone significant share dilution and expensive debt raising, with more to come later in the year. The company is burning $100 million a month and predicts it needs to raise another $750 million to remain solvent until 2022. Share dilutions come with a heavy cost to existing shareholders while expensive debt (10 to 15% interest rates!) costs the business in the years ahead.
- COMPETITION WITH STREAMING SERVICES: The movie theatre business faces increasing competition from streaming services. As the streaming wars pick up, movie theatres will lose theatrical exclusivity as streaming services bid for day-one releases at heavy losses to beat the competition. For example, AT&T’s Warner Bros is debuting all of its 2021 films on its HBO Max streaming service on the same day as the film's theatrical release. This is a huge financial loss but AT&T is willing to pay the price for an edge against competing streaming services. It’s unclear whether same day film releases on a streaming platform can ever become a sustainable business but for the time being, it’s up to AMC to create great movie-going experiences to get people off the couch. In my opinion, as convenient as watching movies at home is, the experience of watching them on the big screen is hard to beat and there remains a strong demand for movie theatres in the long run.
AMC has a bullish short term outlook but its long term prospect remains risky.
In the short term, Google search interest for the stock is picking up and with GameStop's recent unstoppable performance on the back of a “short squeeze” narrative, investors are surely looking to jump to the next distressed company stock.
In the long term, if the pandemic lockdowns continue past 2021, AMC's risk of insolvency increases dramatically. In addition, it’s unknown how consumers will react to films releasing on streaming services on the same day as their theatrical releases. If consumers choose to stay home over going to theatres for new film releases, AMC’s post-pandemic outlook is bleak as its business experiences a structural decline while it has to contend with the high interest debt accrued during the pandemic.