Here’s Why You Shouldn’t Chase AMC Entertainment This Year

The pandemic has had a huge impact on the media and entertainment industry across the world. According to a report from Pricewaterhouse Coopers, cinema revenue will see the sharpest contraction in at least two decades. As per the report, the revenues for the cinema industry are not expected to recover to the pre-pandemic level until 2024. The industry has suffered heavy losses this year, and nothing can be predicted about the situation that will follow. The biggest cinema operator in the world, AMC Entertainment (NYSE:AMC) has seen the biggest fall in revenue this year and has endured several months of closed theaters. In the absence of financial aid, AMC stock has seen extreme lows. 

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Cinema will face stiff competition from in-home entertainment options in the coming year. With no sign of economic recovery, revenue is expected to continue to dip in 2021. The company is burning a huge amount of cash to stay afloat, but how long will that continue? 

What will happen to AMC stock in 2021? Should investors chase it? Let’s take a look at two reasons why you should stay away from AMC.

AMC Stock and Debt Burden

AMC has survived 2020 after burning a significant amount of cash month after month. It has raised $917 million since December, out of which it raised $100 million from Mudrick Capital Management through first lien debt financing and $411 million from a Euro revolving credit agreement. The balance, $406 million, was raised through the issue of common shares. This may be able to resolve the short-term problems, but it does not guarantee liquidity to the company. 

A huge threat to the company is the debt burden. The deferred rent stands at $480 million, and it has an additional debt burden of interest as high as 15%. Now that the company has managed to raise cash, it will also have to pay for the rents. There is no clarity on whether there were rent negotiations and whether it was deferrals or negotiations. The company will have to burn high cash throughout the year to remain afloat. 

The objective of management is to keep the company running amid the uncertainty in the country. I wonder if the company has enough cash to keep going in 2021. If not, it may have to sell some property to raise cash, which will certainly have a negative impact on AMC stock.

The Pandemic and Future of Movie Releases

Another red flag for investors is the increasing competition from in-house entertainment options. Personally, I would not step into a movie theater for at least the next six months. Some may take the risk, but it will not go back to pre-pandemic levels anytime soon. Many will prefer to enjoy movies on their televisions at home. Not many media houses have announced a date of release for their movies.

Another pain point for AMC is a recent announcement from Warner Bros. The company will release all of its movies on HBO Max while simultaneously showing them in the theaters this year. This could harm AMC’s revenue in the long run. 

If movie theaters across the country do not open anytime soon, the streaming platforms will gain prominence. The pandemic gave a boost to streaming platforms like Netflix (NASDAQ:NFLX) and Roku (NASDAQ:ROKU), and they will continue to work for those who want an easy entertainment option. This only puts AMC stock in more danger. 

Bottom Line on AMC Stock

Considering the two red flags discussed above, it is evident that investors should stay away from the stock. The recent announcement that movie theaters will reopen in New York City in March has given the stock a push, but it is too soon to take a call. You never know when the situation or the guidelines may change. Further, one must consider the cost of running a theater at 25% capacity, or a maximum of 50 people per screen, without hiking the ticket cost. 

Until there are enough effective vaccines and we see a significant decline in cases, the movie theater industry will face difficulty. Even if movie theaters open next week, it will take time to gain momentum, and considering the present situation, AMC will not be able to report high earnings per share this quarter. 

It will be interesting to see whether people rush back to theaters or not. But for now, stop chasing AMC stock. 

On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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