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Stocks  | April 21, 2021

There is a bull case for AMC Entertainment (NYSE:AMC) stock. To be clear, I don’t subscribe to that case. But as with nearly every stock out there, a reasonable investor can make a case for being long.

The end of the novel coronavirus pandemic should boost the company’s revenue after an abysmal 2020. Bulls believe that the “death of the movie theater” narrative amid the explosion of streaming services such as Netflix (NASDAQ:NFLX) is overwrought.

There’s even the possibility of a long-term benefit to the business from the pandemic on the competitive front. Smaller, less-capitalized theatres have gone out of business for good. Just in Los Angeles, permanent closures have taken some 300 screens out of circulation.

Indeed, earlier this month one analyst upgraded AMC stock. He argued that the performance of Godzilla vs. Kong shows significant pent-up demand for in-theatre viewing, and bodes well for AMC’s recovery going forward. Indeed, if, thanks to competitor closures, AMC can capture more of that demand in a less-supplied market, there’s an argument for further upside in the stock.

Again, I don’t subscribe to that bull case. But I’ll grant that it’s reasonable. And I’ll grant that, like every investor, I’ve been wrong before and will be wrong again.

But if you’re going to own AMC stock, you need a real thesis. Too many bull cases of late lack that thesis, with many based on three particularly faulty narratives.

Where Was WSB?

The narrative around AMC stock is usually entangled with the short sellers in the stock. In late January, AMC rallied along with GameStop (NYSE:GME) on hopes of a so-called “short squeeze.” Since then, it hasn’t been hard to find vitriolic comments about “the shorts” and their menace to AMC and other stocks. And we’ve seen AMC stockholders hailed as something close to heroes for saving the company from the evil shorts.

It’s too difficult at this point (and at the least would take too long) to disabuse some of the beliefs around short sellers as a whole. So let’s focus on how that narrative fails for AMC stock itself.

First, AMC shareholders aren’t “saving” the company. If anything, they were late to the party.

See, for instance, this Tweet which claimed the January rally allowed the company to raise $900 million and got over 16,000 likes. In fact, the capital raises came before the “Reddit rally,” and sent AMC stock to an all-time low.

AMC needed a higher share price during the pandemic, when it was facing real risk of bankruptcy. WallStreetBets was nowhere to be found.

The Short Squeeze in AMC Stock

Second, a short squeeze is not an investing thesis. It’s a trading thesis. In fact, we’ve already seen this in AMC stock.

If you believe that the January rally was a short squeeze (and I’ve argued it was in fact a “gamma squeeze”), what happened afterward? AMC stock plunged. It’s still down more than 50% from the highs.

That’s not a surprise. That’s literally how it works.

Shorts are forced to cover at artificially high prices. Once they do so, there are no buyers left at the highs. And the stock falls.

That assumes another squeeze is likely. The data suggests otherwise.

Short interest in AMC stock as of this writing is about 73 million shares. That’s about 31% of the float — a reasonably high number, admittedly.

But short interest is also less than half average daily volume over the past three months. The idea that shorts are going to get “trapped” amid so much volume thus seems like a pipe dream.

Even if it does happen, the point is to get out at the top. It’s to sell at $20 in January — not to own at $9 in April. Long-term investors who truly believe in AMC shouldn’t be hoping for a short squeeze. They should be hoping for a lower price to boost returns over time.

The Pandemic Problem

Finally, there’s a narrative that AMC stock is going to rise because AMC’s results are going to improve.

That improvement is unquestionably coming. Revenue declined 77% year-over-year in 2020, obviously driven by closures due to the novel coronavirus pandemic.

But AMC stock is pricing in a lot of improvement, and not just because it’s rallied 336% so far this year.

Go back to the end of 2019. AMC had 104 million shares outstanding (roughly split between Class A and Class B). It closed the year with a stock price of $7.24, for a market capitalization around $750 million. Add debt net of cash of $4.49 billion, and AMC’s enterprise value was $5.24 billion.

As of Mar. 3, AMC had 450.2 million shares outstanding. Its market capitalization thus is $4.35 billion — nearly six times what it was at the end of 2019, obviously before the pandemic arrives. Add in net debt of $5.41 billion and AMC’s enterprise value is now $9.76 billion.

Including debt, AMC’s valuation is nearly 90% higher than it was before the pandemic arrived. In fact, its valuation in 2021 is far higher than it’s ever been going back to its late 2013 initial public offering.

So if an investor argues that the pandemic is going to lead AMC stock higher from here, they have to explain how AMC’s outlook is better in 2021 than it was in, say, 2015. It’s hard to see how that’s the case.

The long-term trend of declining movie theater attendance remains. AMC’s debt load is higher, thanks to cash burned last year.

Netflix has been joined by Disney (NYSE:DIS) and AT&T (NYSE:T), among many others, to launch streaming platforms. Those platforms have driven an explosion in content spend that creates television series that are as good or better than movies.

An investor can dispute these points, certainly. At this valuation, they’d better.


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