Retail traders have shown a keen interest in the theatrical exhibition stock AMC Entertainment Holdings, Inc. (AMC) over the past two years due to its potential for a short squeeze. Along with GameStop Corp. (GME) and Bed Bath & Beyond Inc. (BBBY), AMC became popular during the meme stock frenzy in 2021.
A short squeeze happens when a significant, short-term spike in a stock’s price forces short sellers to buy shares to minimize their losses. Buying shares to minimize losses leads to a further spike in the price. Currently, AMC has a short float of 24.6%, which indicates another potential short squeeze. Let’s discuss why.
AMC currently has very high short interest due to its poor fundamentals and plans to convert AMC Preferred Equity (APE) shares into AMC Class A common stock. The high short demand has caused borrowing fees to skyrocket. Borrowing fees had jumped to more than 750% last week when the pool of borrowable AMC shares decreased significantly.
In March, AMC shareholders approved increasing total shares by converting APE units to Class A common stock. The difference in prices between AMC’s common stock and the APE units provided an opportunity for arbitrage traders to capitalize on the price variance, expecting the prices of the two to be equal once the conversion of the APE units to common shares materializes.
However, a Delaware court denied the company’s plan for conversion of APE units to Class A common stock, including a 10 to 1 reverse stock split. This development led to a jump in AMC shares while APE units tumbled. AMC shares could see further upside as news of Amazon.com, Inc. (AMZN) looking to purchase AMC to promote its content and other services do the rounds.
Any positive development in this regard will likely fuel an upward movement in the stock fueling another short squeeze. AMC’s stock has gained 33.4% in price year-to-date, while it has declined 52.8% over the past year to close the last trading session at $5.43.
Here’s what could influence AMC’s performance in the upcoming months:
Disappointing Financials
AMC’s revenue for the fourth quarter ended December 31, 2022, declined 15.4% year-over-year to $990.90 million. Its net loss widened 114.1% over the prior-year quarter to $287.70 million. The company’s adjusted EBITDA decreased 90.9% year-over-year to $14.50 million. Also, its adjusted loss per share widened 133.3% over the prior-year period to $0.14.
For the fiscal year ended December 31, 2022, AMC’s revenue rose 54.7% year-over-year to $3.91 billion. Its net loss narrowed 296.2% over the prior-year period to $973.60 million. The company’s operating costs and expenses increased 28.2% year-over-year to $4.43 billion. Also, its adjusted loss per share widened 44.8% over the prior-year period to $0.69.
Mixed Analyst Estimates
Analysts expect AMC’s EPS for fiscal 2023 and 2024 to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 14.4% and 7.2% year-over-year to $4.48 billion and $4.80 billion.
For the quarter ending March 31, 2023, AMC’s EPS is expected to remain negative. Its revenue for the same quarter is expected to increase 18% year-over-year to $926.89 million.
Stretched Valuation
In terms of forward EV/EBITDA, AMC’s 44.09x is 406.5% higher than the 8.70x industry average. Likewise, its 2.73x forward EV/S is 48.7% higher than the 1.83x industry average.
Weak Profitability
AMC’s trailing-12-month net income margin is negative 24.89% compared to the 3.34% industry average. Likewise, its trailing-12-month EBIT margin is negative 9.88% compared to the 8.14% industry average. Furthermore, the stock’s 0.39x trailing-12-month asset turnover ratio is 16% lower than the industry average of 0.47x.
POWR Ratings Reflect Bleak Prospects
AMC has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AMC has an F grade for Stability, in sync with its 2.04 beta. It has a D grade for Value, consistent with its stretched valuation.
Its weak profitability justifies its D grade for Quality.
AMC is ranked last out of five stocks in the F-rated Entertainment – Movies/Studios industry. Click here to access AMC’s Growth, Momentum, and Sentiment ratings.
Bottom Line
AMC is trading below its 50-day and 200-day moving averages of $5.36 and $7.17, respectively, indicating a downtrend. Despite a reasonably high short float, AMC’s shares jumped as the Delaware judge ruled against lifting AMC’s status quo order for the conversion of APE stock into Class A common stock and a 1-to-10 reverse stock split. These measures were important for the company in order to deleverage its balance sheet and maintain financial viability.
Despite the chances of a short squeeze in the stock, it could be wise to avoid the stock now, given its disappointing financials, stretched valuation, and weak profitability.
Stocks to Consider Instead of AMC Entertainment Holdings, Inc. (AMC)
Beyond potential short squeezes, unfortunately, the odds of AMC delivering sustained risk-adjusted returns seem greatly compromised. However, there are many entertainment stocks with impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) stocks instead:
Accel Entertainment, Inc. (ACEL)
PlayAGS, Inc. (AGS)
Boyd Gaming Corporation (BYD)
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AMC shares rose $0.10 (+1.84%) in premarket trading Wednesday. Year-to-date, AMC has gained 33.42%, versus a 7.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
