AMC (NYSE:AMC) CEO Adam Aron’s decision to create and spin off AMC Preferred Equity over the summer has been disastrous for investors. Over the past three months, both tickers have shed over 50% of their values. Those unfortunate enough to have purchased AMC stock at its peak last June have lost over 90% on their holding. Moreover, with a bleak outlook ahead and the theatre giant burning its cash reserves at an accelerated pace, it’s best to discard the stock from your portfolios. Hence, we are bearish on AMC stock at this time.
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AMC CEO’s insistence that the lack of quality content is the biggest issue for movie theater chains rings hollow. We saw how movies such as Top Gun Maverick hit theaters earlier in the year, generating over $1.4 billion in revenues. It became the 11th highest-grossing film of all time, but AMC still delivered dismal operating income figures compared to pre-COVID times. These numbers make it clear that movie theaters face something beyond a simple problem. Movie theaters are losing their relevance, and it will take a lot for the firm to solve its operational shortfalls.
Meanwhile, AMC continues to burn through its cash reserves, placing it in a highly precarious position. It hasn’t been profitable since 2018 and has generated positive free cash flows in just one out of the last 11 quarters. Moreover, its stock is down 76% year-to-date. With less-than-ideal conditions ahead, it’s plausible to assume that AMC stock will lose more value and sink further into penny stock territory.
AMC’s Dwindling Liquidity Position
AMC’s balance sheet is certainly in disarray, and its management seems to be running out of ideas. A steep decline in profitability has caused the movie theater giant to burn through its cash reserve, nearly $1.13 billion over the past 5 quarters. AMC bled a massive $280.6 million in cash just this past quarter alone, representing a substantial decrease of over 25%. Ultimately, AMC has been able to stay afloat at the cost of its own financial stability, a situation that shows no signs of improvement in the near future.
AMC’s total liabilities of $11.79 billion comfortably dwarf its assets base of roughly $9.21 billion. This places its equity at -$2.58 billion, which adds to the company’s dicey positioning. Unless it can become operationally profitable or find a way to restructure its financial obligations completely, there will likely be significant shareholder dilution. Therefore, it’s clear that the company faces an uphill battle to ensure all stakeholders are taken care of come 2023.
In addition, the recent conference calls conducted by AMC have been concerning. No one seems to have an answer for how it can turn its prospects around, nor has anybody brought up a plan for sustainable profitability. On a side note, given the weakness in the economic environment, AMC’s CEO requested the board of directors to not increase his pay.
Streaming has infiltrated the entertainment industry and created a formidable challenge for AMC. With millions being pumped into streaming services, it has only had a detrimental effect on businesses such as AMC, as well as an overall decline in theatrical movie releases. As streaming services continue to pop up, consumers have more and more access to content than ever before.
Is AMC Stock a Buy or Sell?
Turning to Wall Street, AMC stock maintains a Moderate Sell consensus rating. Out of 4 total analyst ratings, zero Buys, two Holds, and two Sell ratings were assigned over the past three months. The average AMC price target is $3.53, implying 12.62% downside potential. Analyst price targets range from a low of $1.10 per share to a high of $7.50 per share.
Conclusion: AMC’s Outlook Appears Grim
The outlook for AMC appears to be grim in 2023. With a balance sheet in shambles, an unsustainable cash burn rate, and competition from streaming services, there is no definitive path to profitability. Something must change drastically soon for AMC to survive. Otherwise, it will likely be forced to issue more shares and further dilute existing shareholders. It could be argued that this scenario is inevitable; if AMC continues in its current trajectory, it will continue to falter next year as well. Thus, it’s best to avoid the stock for now.
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