Why AMC’s plunging stock price could keep on plunging

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Like an audience subjected to a bad blockbuster movie, investors streamed out of theater chain AMC Entertainment on Tuesday, sending its stock price down 41% to close at $7.82.

The stock is down 61% since peaking last week at $19.90 in a wave of buying inspired by investors from the Reddit forum WallStreetBets, who also boosted GameStop, BlackBerry, and other companies targeted by short-sellers. Now with the short-sellers largely vanquished, the Reddit crowd appears to be moving on.

On the other hand, AMC’s stock price is still up 289% since the beginning of the year, when it traded for only $2 per share, before Reddit users even noticed that the company was struggling to remain solvent amid the pandemic.

The improvement may be the result of AMC management cleverly using the temporary stock mania to boost its shares, raise more money, and strengthen its balance sheet, analysts say. While back on Dec. 11 the company had warned it might soon run out of cash, last week CEO Adam Aron was crowing to Variety that “imminent bankruptcy is completely off the table. We believe we have the runway we need to get through this pandemic.”

That’s partly because when AMC’s stock was on the rise, thanks to the Redditors, AMC sold 63 million shares and raised $305 million of cash. And private equity firm Silver Lake converted a $600 million debt obligation owed by AMC into stock and sold the stock, effectively eliminating the debt.

Analysts agree the company should now have enough money to avoid bankruptcy and meet its debt service for at least the next year. “We now expect AMC’s liquidity to be sufficient for 2021 and possibly through 2022,” Goldman Sachs analyst Jason Kim noted on Jan. 28.

Getting through 2022 will require theater attendance to rise and that landlords further delay or reduce outstanding deferred rent owed by AMC, totaling $450 million.

Still, while the recent fundraising can carry the company through current conditions of low attendance, there may not be enough profit, even after the pandemic ends, to boost the stock price at all, some analysts say.

“The emotion behind the #SaveAMC movement could carry the shares higher in the near term, but we believe this valuation-be-damned momentum is not sustainable over the long term,” analyst Eric Handler, at MKM Partners, wrote on Monday. He downgraded the stock to “sell” with a $1 price target.

AMC’s box-office take could be severely depressed throughout 2021, even as more people are vaccinated against COVID-19, Credit Suisse analyst Meghan Durkin noted last week. Blockbusters won’t arrive in theaters until late in the year and will stay in theaters exclusively for a shorter time before hitting streaming services, she wrote.

“While exhibitors are excited about the pent-up demand once consumers are vaccinated, we see pressure on attendance,” Durkin wrote. “If consumers are slow to return to the movies due to these market dynamics, management’s assumptions may prove unachievable.” She rated the shares “underperform” with a target price of $1.55.

While the Reddit crowd was taking down hedge funds that shorted stocks like AMC, at least one hedge fund that invested in the theater chain made big profits. Mudrick Capital, which lent money to AMC in December, made a $200 million profit, mainly from bonds it bought last year at depressed prices, the Wall Street Journal reported.

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