AMC’s whipsaw is being propelled by retail investors — many active on Reddit’s WallStreetBets forum — mirroring the trading mania that swept through markets earlier this year alongside GameStop and other companies that institutional investors had bet against. And its rise is just as untethered from financial performance.
Short-sellers have increased their bets against AMC in the past month. On Wednesday, it surged 95 percent to a record $62.55. The same day, company executives unveiled a new portal to connect with individual investors, complete with offers of free popcorn, exclusive screenings and other perks.
Thursday’s swings came after the company announced plans to offer 11.5 million shares and cautioned investors that the market does not reflect the fundamentals of its movie theater business.
But thrill-chasing investors have been rewarded with a staggering run-up. AMC shares began the year at just over $2, exploding nearly 3,000 percent by the closing bell on Wednesday. Since the beginning of May, shares have climbed more than 500 percent and have more than doubled over the past several days.
In a filing Thursday with the Securities and Exchange Commission, the company highlighted the extreme price fluctuations of its stock and the stark disconnect between the passions of retail investors and its actual operations.
“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” AMC said in the filing. “Under the circumstances, we caution you against investing in our class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
The company went on to list several risks to investors, including rapid and substantial price spikes and falls; the fickle sentiment of online trading communities; share prices that diverge from the company’s financial performance; and the market dynamics of a “short squeeze.”
As with GameStop’s previous flash mob ascent, AMC’s wild ride is tied to pessimistic traders who believe that its shares will fall back down to Earth. AMC, given its weak earnings and high debt load, has drawn the attention of short sellers — investors who bet against a company and who stand to make money when a stock price falls.
But in cases where the bearish bet fails to pan out, and the stock price rises, short sellers still have to cover their borrowed shares and are forced to buy the stock back at the higher price. This is known as a “short squeeze,” which can fuel a cycle of even higher prices, as short sellers buy more shares to mitigate their losses and drive prices up.
“Folks, this is a great time to double down into AMC,” wrote one Reddit user, expressing a shared sentiment of trying to weather the harsh downturn. “The squeeze hasn’t even happened yet. Remember GME?”
But the high-stakes fantasies of crushing short sellers while increasing gains are often met with the harsh turns of the market. Other traders are urging caution, warning against the pull of FOMO, or the fear of missing out, and getting caught in the hype of massive winnings.
“For you noobs,” wrote another Reddit user, referring to newcomers, “Don’t FOMO, 99% of you won’t become life changing rich. The people posting $200k gain porn are the same ones with $80k to YOLO into memes. Don’t yolo your rent money, or life savings, or any money you can’t afford to lose.”
The swings for AMC are particular to that company and not to theater chains as a whole. The stock prices and underlying business of rival outfits are far more stable than AMC; as the pandemic fades they have shown sturdier financials and a more orderly stock rise with traditional investors. The share price of Cinemark, the country’s third largest theater chain, has risen 44 percent since the start of the year while London’s Cineworld, which owns AMC runner-up Regal, has seen its stock price climb 52 percent.
David Trainer, chief executive of New Constructs, an investment research firm, said AMC’s surge is yet another sign of the reckless meme stock investing landscape. “AMC Entertainment’s business was trending in the wrong direction even before the Covid-19 pandemic,” he said.
Even before the pandemic, AMC was struggling to break even as it faced a heavy debt load thanks to years of expansion. The company took in $5.5 billion in revenue in fiscal 2019, a number consistent with 2018, but lost a small amount, $150 million. The lockdowns and film-release postponements of the pandemic hurt it further. AMC lost more than $500 million during the first three months of the year and registered a loss of $4.6 billion in 2020, according to SEC filings.
Box office receipts have recently shown promising signs, however. Despite the rise of streaming during the pandemic, “A Quiet Place Part II,” the first major theater-exclusive studio release in eight months, has grossed $61 million in its first six days of release, a number just shy of the $63 million of the pre-pandemic original film in 2018. Theaters hope that momentum can be maintained with future releases, such as this month’s “F9,” and is not simply a function of post-lockdown novelty.
AMC is also using the issuance of the 11.5 million shares to raise money and pay down its debt. That — along with the sale of 8.5 million shares to Mudrick Capital earlier this week and the conversion of a $600 million debt note by investor Silver Lake Partners into stock this winter — has raised nearly $2 billion for the chain.
AMC chief executive Adam Aron had said the sum could allow AMC to execute on “highly attractive theatre acquisition opportunities.”
Many analysts, however, believe that major expansion is a question mark given AMC’s large debt load. Even with the fresh $2 billion, the company is still believed to owe between $4 billion and $5 billion to lenders, including interest. It has closed some 60 theaters since the start of the pandemic, about 10 percent of its overall locations, and few of them are expected to reopen.
Some observers hold out hope the company could take over locations from Pacific Theatres/Arclight Cinemas, a 300-theater Southern California chain that had been forced to close this spring; such a move would require only the assumption of leases and rebranding, not a full-scale infrastructure investment. Aron stoked the possibility by saying this week AMC is “in discussions, for example, with multiple landlords of superb theatres formerly operated by Arclight Cinemas and Pacific Theatres.”
But the company would have fierce competition to take over some of those locations, particularly some desirable Arclight outlets, and would also be competing with some of its own theaters, if it were successful.
AMC could look to further reduce its debt by selling some of its European locations. AMC has about 3,000 screens in Europe, a little less than 30 percent of its overall total.
“The company’s announcement of a raise has clearly sent the stock into yet another whirlwind of volatility and it is no surprise that it was followed by myriad disclosures from the company urging investors to exercise caution,” said Nicole Tanenbaum of Chequers Financial Management.
Given AMC’s heavy indebtedness, it makes sense for the company to fortify its balance sheet by paying down some of its debt by issuing new shares, she said. And as it offers loyalty perks to shareholders, “the company is clearly leaning into the mania,” she added, “as AMC appears to be looking to ride this wave as far as it can take it.”
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