The Recent Pullback in AMC Entertainment Stock Is Just the Start

Stocks to sell

As seen in recent days, even meme stock legend AMC Entertainment (NYSE:AMC) is starting to see the effects of the market growing more risk-averse. Since Sept. 13, shares in AMC stock have pulled back from $51.69, down to around $35.50 per share.

AMC stock

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Unfortunately, this may be only the start of AMC’s collapse in price. Yes, shares in the movie theater chain and Reddit favorite have pulled back like this before in recent months. You may recall prices sinking down to the $30-$40 per share level back in July — after the end of the last big “meme stock” wave.

But while market conditions enabled AMC stock to stay strong through August, that’s not looking to be the case anymore. There’s too much going on market-wide right now for investors to carry on with the “shrug it off and buy the dip” mindset that’s helped delay a market meltdown.

Instead, Federal Reserve tapering, high inflation, rising bond yields, and slowing economic growth will likely send markets as a whole lower in the months ahead. With the shift from a bull to a bear market, many from the “Ape Army” of Reddit retail traders still holding this will be running scared. Once they make their exit? Shares will likely make a tremendous drop (around 84%), to a price more in line with its underlying value.

Why the Ape Army Will Soon Retreat From AMC Stock

AMC Entertainment, along with the other meme stock, GameStop (NYSE:GME), have managed so far to avoid getting sunk down by their fundamentals. In other words, other stocks that have are popular with Reddit traders, like Clover Health (NASDAQ:CLOV), and ContextLogic (NASDAQ:WISH), have both moved lower on company-specific issues. This is despite both names remaining near the top of stocks most talked about on the r/WallStreetBets subreddit.

Yet don’t expect this odd quirk that has helped AMC stock and GME stock hold steady to last. Company-specific factors may not convince meme traders still holding them to cash out. But a full-on stock market correction may just do the trick.

How so? If there’s a flight out of risky assets and into safe harbors like cash and defensive stocks, more speculative plays — like meme stocks — are going to see downward pressure. A modest pullback to $30 per share may not be enough to scare those still holding it with “diamond hands.” What if it crosses below the $30 mark, and back into the $20 to $30 per share range, though?

At those prices, panic could set it in, and the so-called Ape army could really start to make a retreat. With few looking to buy AMC stock, and many looking to unload? It won’t take long for shares to head back to a price more in line with its underlying value. The problem? This “right price” may be more than 80% below where AMC changes hands today.

AMC Is Worth Far Less Than $10 per Share

Without the backup of the Ape army, AMC stock will resume trading on its fundamentals. What does this mean? More likely than not: an ultimate move back to single-digit prices.

AMC may be on better financial footing now than in January, thanks to its $1.8 billion cash position, largely the product of capital raised from secondary offerings. But this came at the cost of heavy shareholder dilution.

Since Oct. 31, 2020, AMC’s share count has gone from around 85.6 million, to around 501.8 million. This has reduced the company’s underlying value per share in the event of a recovery. Based on numbers I ran back in June, even a return to its pre-Covid-19 levels of EBITDA would not be enough to support a $10-$15 per share valuation.

And of course, AMC’s business is still far from fully getting “back to normal.” As I wrote earlier this month, Covid-19’s Delta variant is delaying the theatre chain’s recovery. The rise of streaming calls into question whether AMC’s revenues/operating earnings will ever get back to pre-pandemic levels.

While the company is still operating in the red further shareholder dilution is likely , as a Seeking Alpha commentator recently argued. Despite the $1.8 billion war chest, AMC may not have enough to cover another year of cash burn and any near-term debt obligations. Put it all together, and Macquarie analyst Chad Beynon’s $6 per share price target (around 84% below current prices) could be on the mark.

With the Risk of Price Collapse, Avoid at All Costs

The continued resiliency of the stock market has prevented the bubble surrounding AMC Entertainment stock from popping. But as a market correction draws near? The Ape army soldiers still long the stock will soon start heading for the hills.

Once its meme bubble bursts, AMC stock will fall toward its underlying value (likely a price in the single-digits). With this in mind, avoid AMC at all costs.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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