AMC Stock is Still Doomed to Drop
InvestorPlace - Stock Market News, Stock Advice & Trading Tips The "ape army" will eventually pack it in, sending AMC stock down to a price more in line with its...
“Sell the news” seemed to be the market’s response to AMC Entertainment’s (NYSE:AMC) latest earnings report. After the close on Nov. 8, the movie theater chain reported higher-than-expected revenue ($763 million versus $708 million consensus) and a narrower-than-expected per-share loss (44 cents versus 53 cents consensus), for the quarter ending Sept. 30. Yet, it did not result in another price boost for AMC stock.
Instead, shares sold off as much as 17% this week following the announcement. But after popping today, AMC stock is trading just below $40.
The self-described “apes” long the stock may not be ready to bail on it just yet. As with the other top-tier meme stock, GameStop (NYSE:GME), there are still a lot of retail traders willing to hold it with “diamond hands.”
Coupled with its falling short interest — down to 18.5% of float from 19% last month — a collapse in price may not be imminent. However, at some point (it’s unclear when), the “apes” will finally pack in and take profits. As I’ve discussed previously, once this happens, AMC stock will fall to a price more reflective of its underlying value (under $10 per share).
Recent Developments Do Little to Boost the Bull Case
Perhaps you’ve heard the latest chatter on Reddit or elsewhere about the company’s plans to accept cryptocurrency as payment for gift cards and movie tickets. It also plans to sell its AMC-branded popcorn outside the theaters at grocery and convenience stores and shopping mall kiosks.
These may sound like interesting, outside-the-box ideas. In reality, though, they are likely nothing more than gimmicks.
I’m sure a few crypto aficionados will try it out once or twice. But it’s doubtful this will do much to counter the secular decline movie theaters are experiencing.
As for the popcorn idea, Mark Zoradi, CEO of AMC rival Cinemark (NYSE:CNK), doesn’t see it as a game-changer. In my view, it’s certainly worth trying out, but I have a hard time believing it will help AMC stock sustain its $20.5 billion market capitalization.
Even AMC’s management doesn’t seem overly optimistic about the future. In a press release accompanying the earnings report, CEO Adam Aron said: “We wish to emphasize that no one should have any illusions that there is not more challenge ahead of us still to be met. The virus continues to be with us, we need to sell more tickets in future quarters than we did in the most recent quarter, and adjusted EBITDA is still well below pre-pandemic levels.”
Downside Risk High Once the Meme Crowd Cashes Out
So, what’s the reason to buy AMC stock? Frankly, there doesn’t appear to be one.
For now, the standstill between the long and short side could carry on. But that won’t be the case forever.
Sure, there’s a possibility of another squeeze sending shares back toward their all-time high of $72.62 per share. Yet, compare that to the downside risk of the bottom falling out if/when the “apes” cash out.
It’s not just me who believes a retail trader retreat is all but inevitable. Analysts from the sell-side are starting to issue warnings as well.
For example, Wedbush’s Alicia Reese titled her most recent research note on AMC stock, “Apes will eventually cash out.” In it, she downgraded shares to “underperform” from “neutral.” She did, however, leave her price target the same: $7.50, or more than 80% below where shares trade today.
Reese’s price target is in line with other analyst projections. Per The Wall Street Journal, the median price target on AMC stock is $5 per share, while the high price target is just $16 per share. Compared to the current share price, these targets are much more reflective of AMC’s underlying value, where heavy shareholder dilution has outweighed the benefits stemming from the company cleaning up its balance sheet.
AMC Stock Verdict: A Retail Retreat Remains Very Likely
Headlines celebrating the “AMC ape” community almost make them sound invincible. But will they really hold the stock in perpetuity?
In time, as the gimmicks fail to deliver, all while top execs unload shares, something has to give. At some point, the “apes” will take profits.
The risk-return is simply not in investors’ favor, as a high-double-digit percentage collapse in price seems likely. My verdict on AMC stock is unchanged: Stay away.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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