With the rise of Netflix (NASDAQ:NFLX) and other streaming services, AMC (NYSE:AMC) stock has had a rough few years. The iconic movie theatre chain has still managed to stay afloat, though. But it’s not enough for them anymore as they continue down the path to financial irrelevance once again.
This is not the first time that AMC stock is dropping during the past year. Shares have consistently fallen in the last six months, particularly after two of its top executives liquidated part or all their stakes in the company.
AMC made some announcements recently that investors see as beneficial in the long run, not least of which was refinancing some of its debt. This will lower its borrowing costs by $24 million. The fourth-quarter numbers are also very good. However, the numbers still do not justify the movie theater chain’s enormous market capitalization.
One of the biggest short squeezes in history happened for the company. Many hedge funds had negative opinions about its fundamentals. And it also suffered greatly from COVID-related closures last year. However, Reddit came to the fore, and the rest is investing history.
The chances of a short squeeze are always prevalent with this one. Despite the stock price dropping more than 60% from their historical peak, there is still a lot of optimism around an opportunity to continue reversing those losses in 2021 — which hasn’t happened yet.
With a high-short interest ratio of 21%, there are chances that another short squeeze could be around the corner. Despite a brief slowdown in popularity on Reddit, “ape community” is still engaged. There are discussions about whether or not possible irregularities manipulated AMC’s stock. And AMC is still one of the ten most talked about stocks on Reddit.
However, the fundamentals will eventually catch up to AMC stock.
Silver Linings Pepper Fourth-Quarter Earnings
AMC’s preliminary fourth-quarter total revenue of $1.17 billion surpassed expectations for $1.09 billion and was well ahead of the $162.5 million reported in 2020. Earnings were very high and well ahead of expectations, which means they are strong. The quarter was AMC’s strongest in two years, and it reaffirms our belief that the domestic box office is bouncing back from the pandemic-influenced downturn.
AMC’s valuation is much larger than it should be, relative to the other movie chains. However, they’ve still managed to raise significant amounts of cash to endure and continue making payments on their debt. Cash decreased by $20 million during the quarter as interest payments increased and deferred lease payments were settled.
At first, we thought management had managed to take over a large amount of the outstanding share in early- to mid-2021 and then followed by using this cash balance to caretake certain aspects of the company. The company derives multiple opportunities in the core exhibition operations and expansion into new areas.
While domestic cinema is expected to take a break for a while since the success of Spider-Man: No Way Home, there will be a large summer slate that might significantly increase ticket sales.
Betting against AMC Stock
If you break down the ownership structure of AMC, the majority is public-owned now. Institutional investors make up a significant minority with a minuscule percentage then held by individuals, executives, and special access-only holders.
A company owned by a wide variety of shareholders can help them implement or change policy. AMC is an example of this type of business, and they have stated that CEO decisions are made in the interest of all stakeholders. AMC’s dispersed ownership structure allows the company to independently make its own decisions.
The report from S3 partners showed that short sellers across the industry lost $3.44 billion until early November last year, after managing to recoup some of their losses this year.
Short sellers are now in much better shape. Sure, investing in AMC stock can be a risk. It may go up or down dramatically with no warning whatsoever. However, the risk is what makes it more rewarding for those able to profit from trading an extremely volatile stock. But there is also the prospect of outsized losses as well.
High short interest is usually a reflection of deteriorating fundamentals, bad sentiment among investors, or the over-reacting investment market. These indicators are not always as important as relative strength index (RSI) levels.
But the risks can be high, especially if it doesn’t appear that the price is cratering. That may happen when there’s a sudden increase in trading volume that experts might attribute to media coverage, market enthusiasm on online forums, or other factors. This is good news for those waiting for a better return on their investment with the recent market rise and increase in share trading volume. This can cause some shorts to cover and prices even further upwards. Considering AMC’s history, it’s important to keep these things in mind.
The Bottom Line
AMC is floundering because of its inability to compete with streaming services and the financial problems piling up over the past few years. The last year was unprecedented in terms of Reddit activity and its influence on the stock market. It gave companies like GameStop (NYSE:GME) and AMC a new lease on life. However, things are now getting back to normal.
Under these circumstances, hoping for the stock to pop again at these rates is not a smart strategy.
There are many retail share investors behind them, so they could raise money fast and get back on the right track. Heavy insider sales, though, show that the good times are over, and it’s time to invest elsewhere. Safer, stabler investments might not produce the same thrill as a meme stock, but the time to purchase is now.
On the publication date, Faizan Farooque did not hold (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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his work on InvestorPlace and TipRanks.