AMC (NYSE:AMC) stock has been struggling for the past few months, and it is now at its lowest point in the last year. That’s a bad omen for mem stock investors.
AMC is reportedly in the midst of talks to refinance debt to lower their interest burden. This would also see their maturities extended by several years. AMC’s total debt is around $5 billion, and the company’s CEO has previously said this money is not due until 2023.
It was recently announced that CEO Adam Aron wants the company to be financially stable and in a better position. Against this backdrop, this initiative makes sense. However, the markets are reacting negatively to the news.
AMC has been looking to improve its financial condition after spending much of last year strengthening its balance sheet. The stock skyrocketed due to the increasing popularity of the movie theatre chain on social media. However, the shine is beginning to come off.
AMC is in a tough spot with few blockbuster films attracting crowds for a night at the theater. This likely won’t give them back the business they lost before the pandemic. The bulls might argue that we just had an exceptional fourth quarter in terms of ticket sales. But AMC’s business model is struggling against a secular trend. And that won’t change course anytime soon.
Spider-Man Saves the Day
As the impact of the Covid-19 pandemic wanes, we will see an improvement in ticket sales. However, there is a growing consensus that we won’t see a rebound to pre-pandemic levels of cinema attendance. That is due to several factors, including most importantly streaming. But for now, Spider-Man: No Way Home has done quite well at the box office, leading to very healthy fourth-quarter ticket sales.
The movie continues to do well on the global box office and has topped $1 billion. The last film to accomplish this task was 2019’s “Star Wars: The Rise of Skywalker,” before the pandemic began. This shows that there is still a high degree of interest in going to the movies for certain blockbuster films. Several movies on the horizon can continue to move the needle. However, big tentpoles alone will not ensure a return to greener pastures for AMC.
The latest installment in the Spider-Man series was released in the second half of December and got 66% of all domestic film earnings over the first five weeks.. That kind of domination is rare, even for movies from Marvel Studios that rely on a huge inbuilt audience.
Non-superhero movies have been struggling to compete with the success of the comic-book genre, which are more popular among audiences. This isn’t good for the industry because people are less likely to go to theaters when these big tentpoles do not release.
At the same time, we see a seismic shift in the way we consume content.
Can AMC Stock Compete With Streaming Plays?
The movie industry has seen a dramatic shift in the last decade. The rise of streaming services like Netflix (NASDAQ:NFLX) and Amazon Prime has led to a decline in box office sales. These streaming services are now the dominant source of entertainment for many people.
The impact on the film industry has been huge. It is not just about box office sales but also about how movies are made, marketed and distributed. Cinephiles built the film industry to create an experience that you can only get at the theater with other movie-goers around you. The experience is more personal and interactive with TV screens and home theaters.
Theaters are at the center of AMC’s strategy. They have been focused on improving their theaters and creating a more premium experience for customers. At the same time, AMC has invested $25 million to persuade you that the movie theatre experience is better than watching from home. They are also doubling down in new leases, meaning they are not shifting their business model anytime soon. Yes, they have announced a host of interesting initiatives that are interesting. Still, the company’s chances of making a clean break from its business model and reinventing itself are unlikely.
AMC Entertainment Is in a Financially Precarious Position
AMC earnings are deteriorating with no end in sight. Hopefully, revenue and EPS estimates will stabilize. However, it is unlikely that the company is a long-term winner. The company had a tough third quarter, reporting increases in losses that they say are not likely to decrease any time soon. A contributing factor is the $120 million of annualized cash burn.
AMC posted huge losses in the third quarter, but revenue was up 539% from last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are still below pre-pandemic levels. At the same time, the Omicron variant will continue to impact the film industry in the coming years.
The company’s debt load has increased over the last few years. It paid $80 million in interest expense just in the third quarter. The major issue for the company is whether they can manage their new model without tapping the equity markets.
Interestingly, AMC requested that its shareholders greenlight an equity issue of 25 million new shares. They then retracted this request after pressure from Reddit. AMC’s high cash balance is down to selling stocks at inflated prices last year. However, as the company continues to burn cash and struggles against the secular trend of streaming, it will need to tap the equity markets again, diluting the shareholding.
No wonder AMC Entertainment CEO Adam Aron sold 625,000 shares of his holdings — half of what he intends to sell in the future. The insider sales by executives of AMC stock could be a negative indicator for investors. It could mean that they are cashing out before a crash or another event that will negatively affect the movie theater chain.
AMC Stock Will Return to Single-Digits Soon
In recent years, AMC has struggled with declining attendance and revenues. This is due to the rise of streaming services like Netflix and Hulu. In order to combat this, they launched a streaming service in 2018 called AMC Premiere. This streaming service offers an unlimited number of movies for $20 a month.
However, AMC remains highly reliant on the movie theatre business, which will not change anytime soon. AMC is a company that is expected to continue to struggle in the future. They are expecting negative cash flow, declining revenue, and a tough outlook. Therefore, it is best to avoid AMC stock.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his analysis on InvestorPlace and TipRanks.