It's been an incredible summer so far for theatre operators like AMC Entertainment Holdings (AMC, Financial). Audiences are flocking in droves to theatres on the back of multiple big ticket releases. Hence, there's plenty to like about the industry's chances and AMC stock. However, AMC's troubling liquidity position suggests it's not out of the woods just yet.
Audiences are finally back, and the trick is now to keep folks coming. Film releases since December have been killing it at the box office, and there are plenty more releases before we say goodbye to 2022.
Naturally, the challenges in terms of valuations and stubborn debt levels will play a huge role in weighing down AMC stock. With a spectacular film slate ahead and strong pent-up demand from cine-goers, I expect AMC's fundamentals to improve substantially in the next couple of years. However, whether this will be enough to curb its massive debt load is still a big question mark.
Disney to the rescue
Over the past couple of months, it's been all Disney (DIS, Financial) for movie buffs. We had "Doctor Strange in the Multiverse of Madness" racking up a $185 million opening weekend domestically, followed by "Thor: Love and Thunder," which made over $143 million in its first weekend. Looking ahead, there are a few more big-ticket Disney releases during the fourth quarter which could potentially generate similar numbers. Blockbuster releases from other film studios are likely to rake in the cash for AMC and its competitors as well.
I think AMC's proactiveness during the beginning of the pandemic will likely help its business significantly down the line. It didn't hunker down when Hollywood shut the door on major film releases. It introduced private screenings, mobile orderings and reserved seating.
As demand recovers now, folks are spending more time at its concession stands than ever. A testament to that notion is that AMC announced recently it would be delivering its branded popcorns through Uber Eats in Kansas and Chicago.
These developments are likely to silence many critics and establish AMC as an undisputed giant in the space. The rest of the summer might not pack the same punch as the first half, but it seems to have already won the battle. Exhibitors are back, and AMC stock should follow suit.
Mounting debt load
Unfortunately, AMC continues to struggle with its dwindling cash balance and massive debt load. Its first quarter results were encouraging in terms of its top-line performance but failed to offer any assurance to its investors regarding its financial flexibility. In fact, it burned $330 million in cash during the quarter, which was slightly higher than the prior-year period.
Hence, despite its management talking a big game regarding its innovations and box office numbers, AMC is still in a rut. It became a popular meme stock during the pandemic, which allowed it to raise cash via additional stock sales, but as it turned out, that wasn't enough to dent its debt either. Its debt balance stands at a colossal $10.78 billion, which dwarfs its cash balance of $1.16 billion.
Nevertheless, the future is now for the company, and it seems to have a viable path to keep the lights on at least. Its management must avoid wasting resources on unrelated investments and consider bringing down its leverage.
Bottom line on AMC stock
AMC's problems have been well-documented over the past couple of years. Its status as a meme stock helped it shore up a truckload of cash, but it's burning through it at an alarming pace. The massive growth in its top line should limit the bleeding, but it will take a lot for it to bounce back. The problem is that no matter how much cash you throw at a bottomless pit, it will never be full. If it can't generate more cash than debt on a structural basis, it's a broken business model.
The future for AMC looks bright considering recent results, but I think it's best to avoid the stock for now and watch it from the sidelines. Investors should look beyond the glitter of its revenue growth and look at its financial positioning to see if it can fix its structural problems.
