Here We Go Again... AMC Is the New GME, But This Time with Free PopcornBy Berna Barshay  The WallStreetBets crew from Reddit is back, and its latest object of affection is the stock of movie theater chain AMC Entertainment (AMC)...
Like GameStop (GME) before it, shares of AMC are going parabolic. They were up 116% last week, then up 23% yesterday. As of earlier this afternoon, shares are up more than 100% on the day. Take a look... I went back to the beginning of 2020 – well before the COVID-19 crisis shuttered theaters for months – to show just how much higher AMC shares are versus where they were before the company lost almost $2 billion last year and burned through more than $1.3 billion of cash. Regular Empire Financial Daily readers know that I'm generally bearish on the movie theater business in the post-COVID world. The pandemic upset an already delicate but decades-long relationship between theater chains and the Hollywood studios that provide them with product. In my very first week writing this newsletter, I discussed the rift that developed between AMC and Comcast's (CMCSA) Universal Filmed Entertainment when the latter decided to release its animated film Trolls: World Tour directly to home viewing as a $19.99 premium video on demand ("PVOD") title in the peak of the first wave of the pandemic in the U.S. The dispute between AMC and Universal was just the first of many cracks in the theater-studio relationship to develop over the course of the pandemic, as studios scrambled to maximize their return on costly films already completed but not yet released before the extended movie theater shutdown. Not too long after Universal went direct to consumer with Trolls, Disney (DIS) followed suit, releasing the highly anticipated, big-budget live-action reboot of Mulan as a PVOD title. At that time, I explained that AMC was "the most leveraged of the theater chains" and noted the company had come to an agreement with Universal, allowing the studio to send films to PVOD "just 17 days (three weekends) after they're released on big screens." I thought AMC was being irrational at the time... and I wasn't alone. U.K.-based Cineworld (CINE.L), owner of the second-biggest U.S. theater chain, Regal, called AMC's deal with Universal "the wrong move at the wrong time." WarnerMedia initially tried to support theaters by releasing director Christopher Nolan's Tenet exclusively to theaters despite a pandemic-wary consumer over Labor Day weekend. But when that flopped, Warner decided to put the consumer – who clearly wants to watch new releases at home – first. In December, WarnerMedia announced that all 17 films slated for 2021 would be released on its HBO Max streaming service and in movies theaters simultaneously. Movie theater attendance had been in secular decline for years, but studios – who hold all the cards here – had been supportive of maintaining the 13-week or so exclusive theatrical window for new releases, partly because so many systems – from talent compensation to awards eligibility – relied on this window, but mostly because studios made a lot of money charging consumers at the theater and then later at home in separate windows. But consumer preference has been shifting to home viewing for a long time now... And the stocks of legacy media companies have been increasingly driven over the past year by net subscriber additions for streaming services rather than actual earnings per share ("EPS"). The pressure of both consumers and investors preferring streaming was like water being held back by a dam, and the pandemic created a lot of cracks in that dam... which seems to have now given way. Pandora's box has been opened in terms of the abandonment of an extended exclusive theatrical window, and it's hard to see movie theater attendance ever going back to where it was in 2019, when 1.2 billion movie tickets were sold in the U.S... which was already a big drop from the recent peak in 2002, when 1.6 billion tickets were sold. But these are fundamentals. No one buying AMC shares right now cares about that. AMC may be a secularly challenged company with earnings in decline as its core business comes under assault by technology and shifting consumer preference... But the same words could have been previously uttered about GameStop. The bull case – which is winning the day – goes something like: HODL [hold on for dear life], my fellow Apes [WallStreetBets users like to call each other "apes"]. An unusual stock transaction that happened over the weekend seemed to set off the latest wave of mania... In a press release Tuesday morning, AMC announced that it had sold 8.5 million shares to Mudrick Capital Management at $27.12, which was a 4% premium to Friday's close. This was unusual because after-market transactions usually take place at a discount – not a premium – to the latest market price. The idea that a fund would plop down $230 million for AMC shares over the weekend when the markets are closed seemed to be a vote of confidence in the company. Of course, the devil is in the details... There was no lock-up and the new shares were immediately tradeable by Mudrick. And Mudrick did indeed trade them... By midday Tuesday, Bloomberg was reporting that Mudrick had dumped all the shares at a profit. It was the ultimate flip trade... The fund only owned the shares for less than three hours of the market being open. As if this wasn't enough, right after blowing out of the position, Mudrick was out telling people on Wall Street that AMC is "massively overvalued." Some words come to mind to describe this flip trade... "pump and dump." "Manipulation." "Shady." But is it illegal? I have no idea. The more interesting question is whether this quick flip would shake the confidence of the many retail holders of AMC shares... After all, Mudrick's vote of confidence quickly turned into the opposite. But the WallStreetBets crowd proved unflappable and responded by buying more AMC and shorting shares of Mudrick Capital Acquisition II (MUDS), a special purpose acquisition company ("SPAC") sponsored by Mudrick. MUDS shares closed down 15% on Tuesday. The rallying cry for buying more AMC centered on how the Mudrick money would be a war chest for AMC to go on the offensive with acquisitions. Where AMC was and where it is now... Back at the end of 2019, AMC's enterprise value ("EV") – the sum of its market cap and all its outstanding debt net of any cash on its balance sheets – stood at just over $5 billion. Today, with the stock trading around $62 per share, the EV stands at almost $36 billion. Does anyone really think that the pandemic made AMC worth almost 7 times more than it was worth before? What has happened since then? Well, the exclusive theatrical window blew up, theaters were closed, and AMC burned $1.6 billion of cash in five quarters. Clearly a recipe for EV going up 575%. And just for comparison's sake... over the same period, Internet giant Amazon's (AMZN) EV went up just 75%. Pandemic winner poster children like video chat service Zoom (ZM) and home fitness company Peloton (PTON) only saw their EVs rise 350% and 100%, respectively, over the same time period. At its current EV of $36 billion, AMC is now more highly valued than media companies with much larger and more dominant businesses such as news and sports titan Fox (FOXA) and satellite radio operator Sirius XM (SIRI). Put in context yet one more way... AMC is trading right now at a multiple of EV to earnings before interest, taxes, depreciation, and amortization ("EBITDA") of around 61 times, using 2019 EBITDA, which was unaffected by COVID-19. On this basis, Disney is trading at 24 times. Netflix (NFLX) is trading at 34 times. Moving away from media to some other widely held favorites, you can own Amazon right now at an EV/2021 EBITDA of 21 times and Apple (AAPL) at 18 times. Does anyone truly believe that AMC deserves 3 times the multiple of two of the biggest and best-run companies in the entire world, both of which are expected to grow revenues by 30% this year? Keep in mind that before the pandemic, AMC typically traded at an EV/EBITDA multiple between 7 and 8 times. Occasionally, it hit 10 times. Now, it's 61 times. This is just dumb... And it won't end well. I know this. But what I don't know – and this is the key risk to betting on a return to rationality by shorting the stock, buying puts, or selling calls – is how long this can go on for.
| Recommended Links: | |
 Log in to Marc's $5,000 system A website that predicts tomorrow's stock ratings on Wall Street... built by the very same man who helped create the entire rating system! Last year alone, it pointed to RIOT before it rose 10,090% in 11 months... APPS before it rose 789% in 8 months... OSTK before it rose 1,050% in 4 months... and more. Today, you can claim a free year of access. | |
|
Meanwhile, the company is really leaning into this short squeeze bubble... AMC CEO Adam Aron has been cheekily engaging AMC's self-described apes for weeks now on Twitter. Consider these meme tweets from May 12... Source: Twitter/CEOAdam AMC took its explicit flirtation with retail investors to a whole other level this morning when it announced the launch of "AMC Investor Connect," which "allows AMC shareholders to self-identify through the AMC website and receive important AMC special offers and Company updates." In the press release, the company noted that "more than 3.2 million individual investors owned a stake in AMC as of March 11, 2021" and that retail investors comprised more than 80% of the ownership of the Company as of that date. While I know tons of brilliant and wildly successful individual investors, 80% retail ownership is not normal, and it's a red flag... especially for a mid-cap company like AMC. I don't believe that institutional investors have flooded into the stock at these higher levels, except those playing the squeeze. These institutions would be traders – not long-term investors – attempting to ride the coattails of the retail-driven explosion in the shares, confident that they will be able to front run retail on the way out. Simply put... if retail made up 80% of holders on March 11, I don't think that number is likely much lower today. Investors who sign up for AMC Investor Connect are going to get an initial offer of a free large popcorn at the theater. From my memory, that overpriced popcorn would set you back around $8 in New York City... I'm sure it costs less in other markets. But even at $5 for a large bucket, that free gift with purchase of a share of stock may actually prove worth more than the share itself, with a long enough time horizon. So, what should investors do about AMC shares? A couple of friends contacted me this week asking this very question. There's no good answer for this. These shares shouldn't trade at $60 and they shouldn't even trade at $20, where they changed hands this time last week. There's no realistic justification for this valuation... It's all about supply and demand imbalances, which are almost by definition temporary... but often seem to last just until people can't bear to stay short anymore. As I told my friends, AMC is at best worth in the single digits... It might even yet be a bagel, that is, headed to zero in a future bankruptcy. But could AMC shares go to $100 first? Sure, why not. They are already disconnected from reality. Once trading in fantasy land... why not $100? Why not $1,000? None of the "diamond hands" crowd is pulling out a calculator to figure out the share price based on a projection of 2024 EBITDA and applying a chosen enterprise multiple to that. It's just the latest rocket ship. And the loyalty – at least for now – of the AMC "ape squad" is apparent, with banners touting the stock flying over Chicago... Source: Twitter/Jingalbellz And marchers taking to the streets in Boulder, Colorado... Source: Twitter/AlmostMedia To be honest, I've never seen anything like this in my nearly 30-year career in the markets. To me, with the banners and signs, we have officially crossed over into "weirder than GameStop" terrain. While professional investors might want to wade into the treacherous waters of betting on a fall in AMC, I would recommend that non-pros just stay away. As I told a friend, "AMC stock is a slot machine now." If you chose to go long AMC shares, recognize that you're gambling, not investing. And if you choose to go short, recognize that this may end up a case of "the market can stay irrational longer than you can stay solvent." In the mailbag, more on Amazon's purchase of the MGM studio and readers were very clear about who their favorite James Bond is... Has anyone out there had any luck playing AMC – or any of the other "meme stocks" – either long or short? Who do you think is actually paying for the banners that have flown over Chicago and New York... Do you think it's really retail investors, or are hedge funds piling in? Do you agree with me that movie theater attendance is likely to settle out permanently lower long after any risk from COVID-19 has passed? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "Berna, I am with you that I view video as a bonus [with Amazon Prime]. I would not cancel Prime if they got rid of their streaming service. "As far as the Amazon Studio, John Malone said in a CNBC interview a few years ago that he thinks Amazon's end game with Amazon Prime Video is likely to be a platform rather than a content owner. I think what he said makes a lot of sense. However, I think that has proved difficult in a world of Dispersion (as coined by Professor Scott Galloway), where everyone is vying to go direct to consumer through streaming. "Amazon has to produce their own content until some of these other businesses lose out in the DTC game (because nobody is going to want 10 different $7-12/month content subscriptions). At that point, Amazon can position itself to start picking them off and gaining their content and/or placing them on their platform like they've done in the past with CBS, PBS, and Cinemax. Eventually, maybe they are what the Apple Store is for music, but they have to keep producing content if they want anything meaningful to distribute until their opportunity arises. "Good and thought-provoking article as usual! Thanks for everything!" – Greg S. "Your only question of 'importance' is who is your favorite James Bond? Easy – Shawn Connery – may he live forever in the role." – Ramona R. "Sneaking into a theatre with my cousin when we were ten to watch a double header of Thunder Ball and You Only Live Twice places my first place vote with Sean Connery. Daniel Craig is a close second." – Rich F. "James Bond SEAN CONNERY !!!!!!!!!!!!!!" – M.K. "Sean Connery the first James Bond and Rodger Smith, best dressed and groomed of all the guys that played Bond." – Stanley K. Regards, Berna Barshay
June 2, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
| 
Post a Comment
Post a Comment