Over the past month, shares of AMC Entertainment (NYSE:AMC) have traded in a relatively narrow band around $10 per share. In recent days, though, we’ve seen AMC surge on retail interest, the likes of which we haven’t seen since early this year.
That’s right folks, it looks like the short squeeze is back on.
It’s a retail investor’s market out there today, and retail investors are certainly having their day in the sunshine.
Let’s take a look at whether this trend can last. (See AMC stock analysis on TipRanks)
Market Capitalization Simply Doesn’t Make Sense At These Levels
Before buying any stock, investors would be wise to perform some basic fundamental analysis.
Yes, investing in the trendy stock is exciting, and there certainly is the possibility of another short squeeze from here. The idea that any stock could “go to the moon” is enticing for gamblers in the options casino. Those who are looking to put a few shekels to work on a long-shot bet, could go for it and buy AMC stock.
On the other hand, long-term conservative investors may want to steer clear of this whole ordeal. Considering how far AMC has already run, it’s easy to see just how overvalued the company is at present.
For one, the company’s current market capitalization is roughly 50% higher than it was during the best days of AMC’s previous all-time highs.
That’s right, it’s valued more highly than ever before, by a large margin, amid uncertainty around future cash flows. A rising share count is responsible for this. The fact that AMC’s price per share is lower than it was in the 2015 – 2017 period is meaningless, given that the number of shares outstanding has quadrupled since then.
Back to the Movies
Many agree that pent-up demand is likely to fill theaters to capacity once regulations are lifted fully across the country. Additionally, AMC’s rapid share price increase has provided more than enough capital via equity issuances to allow the company to make it through the COVID-19 crisis.
However, movie theaters have capacity limits. Thus, revenue and profit growth are capped at a certain level. It’s unlikely to think that movie theaters will somehow outperform their brightest days of four or five years ago by a 50% margin. Those were the days when capacity levels peaked and the movie industry was at its strongest point.
Additionally, deferred rent and other liabilities that have stacked up as a result of the pandemic still have to be paid. Therefore, AMC likely will not be profitable for some time.
AMC might be irrationally priced at current levels based on speculative hysteria that probably cannot last.
What Analysts Are Saying About AMC Stock
According to TipRanks’ analyst rating consensus, AMC stock comes in as a Hold. Out of 6 analyst ratings, there are 1 Buy recommendation, 3 Hold recommendations, and 2 Sell recommendations.
As for price targets, the average analyst price target is $7.13 with a 49.8% downside. Analyst price targets range from a low of $1.00 per share to a high of $16.00 per share.
We’ve all had a year away from the movies, and many would agree that dinner and a movie would sound good right about now.
On the other hand, streaming platforms and large Hollywood production studios have had a year to shift their business models toward a future without movie theaters. It turns out that they have made it through just fine.
Movie theaters may not be done quite yet. However, attendance numbers were already plummeting prior to the pandemic. The pandemic forced audiences to stay away from movie theaters, but many were already choosing to do so of their own volition before these pandemic-related restrictions were in effect.
AMC’s valuation does not make sense today. This stock could surge on another massive wave of retail buying, but if the laws of finance still hold, this stock could nosedive back to earth. Eventually.
Disclosure: Chris MacDonald held a short position in AMC stock at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.