I am bearish on AMC Entertainment Holdings, Inc. (AMC) as it remains unprofitable and is still dealing with headwinds from the COVID-19 pandemic, yet its stock price remains well above the average price target, and Wall Street analysts are generally bearish on it.
AMC Entertainment Holdings specializes in the entertainment market through many of its subsidiaries. It once had a reputation for being the #1 movie theater chain in the world. AMC Entertainment still lives up to this name even though consumers have largely moved on to streaming services. In fact, its theater division maintains the number one market share among the top 15 DMAs.
The company owns, or partially owns, ~1,000 theaters with ~11,040 screens around the world, most of which are megaplexes. Its primary base of operations is in the U.S., but AMC also maintains a significant presence in Europe through various subsidiaries.
Strengths
Despite its prominent position in the market as an entertainment company, AMC has come to the spotlight for a different reason: being used as a meme stock. Retail investors over at Reddit Wall Street Bets would use the stock to trigger a ‘short squeeze.’ The investors discovered that purchasing AMC stocks at low prices in larger volumes increased the stocks’ value, forcing short sellers to buy higher and causing them to lose money.
This has helped AMC by enabling it to issue shares at high valuations and then use the proceeds to strengthen the balance sheet and business.
Recent Results
AMC’s Q3 report showed that the business is finally emerging fully from the COVID-19 headwinds as, for the first time since Q4 2019, substantially all of its theaters worldwide were open for the entirety of the quarter. The company saw marked improvement quarter-over-quarter in terms of tickets sold, consolidated revenues, and net income during Q3, and the company reported similarly encouraging numbers from the beginning of Q4.
Valuation Metrics
AMC stock is very difficult to value right now as the company’s profitability is impaired by headwinds from COVID-19 and is only just now beginning to truly emerge into a more normalized environment. The company currently trades at nearly 56x forward EBITDA estimates but is expected to see substantial EBITDA improvement moving forward.
Wall Street’s Take
Turning to Wall Street, AMC stock has a Hold consensus rating. This is based on zero Buys, three Holds, and one Sell rating assigned in the past three months. Additionally, the average AMC Entertainment price target of $11.75 puts the downside potential at 31.1%.
Summary and Conclusions
AMC stock is highly speculative, with a wide range of potential outcomes for investors over the long term. While shares have largely deflated from the meme-stock-fueled bubble of a year ago, they still appear on the expensive side relative to the average analyst price target as well as on a valuation multiple basis.
If the company can successfully innovate and generate additional revenue while also reinvigorating its core theater business in the wake of the COVID-19 pandemic, it could generate decent returns for shareholders. However, the valuation does not appear very opportunistic right now.
As a result, investors may want to steer clear and wait for a lower stock price before adding shares.
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