The stock finished the week nearly 300% higher and even cracked the $20 a share mark for a moment on Wednesday. CEO Adam Aron's announcement that bankruptcy was "off the table" after he found new funds through debt in new equity gave the stock a boost in the beginning of the week, but the short squeeze took it from there.
Now the company is considering selling even more stock to take advantage of the sudden spike -- but investors should remember that even as the share price has skyrocketed, the business is still in a terrible position. Here are 5 reasons why the stock is still bound to crumble over the long term.
1. Share dilution is out of control
In the third quarter, AMC had an average of 107 million shares outstanding. By the end of October, that had reached 137 million, and since then the company has sold about 260 million new shares to avoid bankruptcy, bringing its shares outstanding to approximately 400 million. In other words, shareholders who have held their positions over the last six months now own just one-quarter of what they did in the third quarter. While that dilution is a better outcome for shareholders than bankruptcy, the company now must generate four times the profit it had made before the pandemic for those shares to be worth the same.
Considering the other challenges the company faces, that's going to be virtually impossible.
2. Debt is out of control, too
Even before the pandemic, AMC was bloated with debt. The company finished 2019 with $4.7 billion in corporate borrowings and just $265 million in cash. As of the end of the third quarter, that debt had ballooned to $5.8 billion. The company has added to its borrowing since then, and much of the recent loans have come at interest rates as high as 15%, a sign of both the company's poor creditworthiness and how difficult it will be for AMC to escape this level of debt even when the crisis is over. In 2020, it was on track to pay $311 million in interest expense, which exceeds its peak operating income in a single year. From a financial standpoint, AMC has put itself in a hole it can't get out of, as it won't be able to turn a profit with so much interest to pay.
3. It's a declining industry
In the U.S., where most of AMC's theaters are, overall movie ticket sales peaked in 2002 at 1.58 billion. In 2019, before the pandemic, it was 1.23 billion, and that's even as the U.S. population increased by about 15% from 2002 to 2019. Ticket prices have gone up more than 50% since 2002, so revenue has increased in the industry -- but the declining attendance is a real problem.
Movie theaters haven't innovated much, and there are many more entertainment options than there once were, including mobile devices and gaming, social media, and video streaming. Meanwhile, other components connected to AMC's business, like malls, are also on the decline. The entire mall ecosystem, including movie theaters, is getting crushed by the pandemic, and it will be difficult for it to fully recover.
4. Studios are holding the chips now
Over the last year or so, a drumbeat of new streaming services has landed, including Disney+, Apple TV+, Comcast's Peacock, AT&T's HBOMax, and Discovery Communications' Discovery+, and ViacomCBS's Paramount+ is coming out soon. Not only do these new options give would-be moviegoers more reasons to stay at home, they also give studios the ability to deliver content directly to audiences, eliminating theater operators like AMC, which are essentially middlemen. Studios have had ample opportunity to experiment with this new format during the pandemic, and they seem to like it. Warner Media, which is owned by AT&T, said it would release all of its 2021 movies directly in theaters and on HBOMax. Comcast-owned Universal negotiated the exclusivity window with AMC down from 75 days to 17 days, and can now put its movies on Peacock. Meanwhile, Disney has tried charging for movies like Mulan on Disney+, and took Soul straight to the streaming services.
When the pandemic ends, we may find that the studio-theater relationship has permanently changed.
5. The pandemic isn't over
The stock's recent gains would be absurd even if the company wasn't in the midst of an unprecedented crisis, but the business is still going to be bleeding cash through at least the summer, when experts have said that we may be able to return to some degree of normalcy.
AMC burned an average of $124 million in cash in each of the last three months of 2020, or nearly $400 million for the quarter. The first quarter is likely to see a similar cash burn rate as well. Management said the company raised enough cash to survive this year, but that's very different from being in a position where it can thrive. It still needs to endure another six months or so of a terrible business climate, and its financial position will only be in worse shape than it is now when theaters can reopen safely.
At this point, the most realistic path back to profitability is for AMC to sell billions in new equity so it can pay down its debt. But that would only dilute shareholders further. There's no realistic path to success here for the company or shareholders. The best move here for AMC investors, as one movie buff might say, is to take the money and run.