Pulling back after last month’s madness, will AMC Entertainment (AMC) bounce back any time soon? Don’t count on it. Shares in the struggling movie theatre chain may have less room to fall than other heavily shorted stocks that were squeezed by traders on the WallStreetBets Reddit forum.
Yet, at Feb. 10’s closing price ($5.80 per share), there’s still not much value here. Why? For starters, it’s still trading at a substantial premium to its peer, Cinemark (CNK). And that’s not all. The dilution from its recent capital raise will make it tough for shares to gain further from here.
To top it all off, given the uncertainties regarding when (or even if) the cinema business will recover fully from COVID-19, it’s clear there isn’t much opportunity here.
While the company may be able to avoid bankruptcy, shares will likely continue to fall back towards their pre-spike prices ($2 per share). Perhaps at lower price levels, it could be a worthwhile turnaround play. For now, however, your best move is to wait for the dust to settle before buying.
AMC Stock: Even With Capital Raise, It’s Still a Long Road to Rebound
The short squeeze has come and gone, but it wasn’t all for nothing. Taking advantage of the skyrocketing interest in its stock, AMC raised $305 million via a direct offering.
Coupled with its other recent capital raises, the theatre chain now has $900 million in fresh capital in its war chest. With this, bankruptcy fears have been significantly reduced.
However, avoiding bankruptcy is only the first step towards an overall recovery. Based on valuation metrics, shares remain overpriced. As those who dived into the stock last month throw in the towel, expect its downward slide to continue.
To what extent will AMC stock continue to fall? A pullback to around $2 per share appears likely, and further declines from there aren’t out of the question.
Based on Valuation, Shares Have More Room to Fall
It’s tough to value a business like this in today’s environment. Given the cinema business remains heavily depressed due to the ongoing pandemic, it’s not fair to use near-term results for valuation purposes.
Yet, as shares have sold off from $20 per share down to under $6 per share, AMC stock remains way overvalued. Why? Three key reasons. Firstly, at today’s prices, shares trade fairly close to where they traded just before the pandemic.
Right off the bat, this makes pulling the trigger now problematic. Buying AMC at $2 per share on the hope that it bounces back to $5 per share could be worth it. But, buying it at $5.50 and hoping it recovers back to $7 per share? Not so much.
Secondly, the shareholder dilution discussed above means the pie is now cut into many more slices. With the underlying value of each share reduced, any sort of rebound after it bottoms out again could be lower-than-expected.
Thirdly, with shares trading at a substantial valuation premium to rival Cinemark, the stock “as is” may be worth even less than $2 per share. Using the enterprise value/sales (EV/Sales) metric, Cinemark trades at 4x its trailing twelve-month sales.
AMC trades at an EV/Sales ratio of 5.25x. Given its highly levered balance sheet, if valuation contracts to that of Cinemark, this stock could potentially fall to prices well below the still pessimistic $2 per share price target.
What Wall Street is Saying About AMC Stock
According to TipRanks, AMC Entertainment currently has a Moderate Sell consensus rating. That’s based on 2 Hold ratings and 1 Sell rating.
When it comes to analyst price targets, the average comes in at $3.25 per share (about 41% possible downside from today’s prices). These forecasts range from a high of $5.50 per share, to a low of $1 per share. (See AMC Entertainment stock analysis on TipRanks)
A Questionable Buy at Lower Prices, Avoid for Now
Not only is AMC Entertainment overvalued at today’s prices, but with the cinema industry’s uncertain prospects, along with the recent shareholder dilution, it’s questionable whether $2 per share is a reasonable valuation for the company.
Bankruptcy may be off the table. However, given this company’s rich valuation relative to rivals like Cinemark, the stock could continue to fall, and once it bottoms out, languish for quite some time.
So, what’s the best move with AMC stock today? Definitely avoid it for now. And if it falls to lower prices? Continue to take a cautious approach.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article 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.
