The wallstreetbets Reddit crowd has been able to materially help AMC outlast Covid-19 and get to where movies are reopening and people can buy theatre popcorn. In 2021 AMC has been able to sell shares at prices significantly higher than they were in 2020. This has allowed the company to survive $1.3 billion in negative free cash flow last year and gear back up for reopening.
The visibility and volatility that AMC has enjoyed as a meme stock has brought it to the attention of traders that have worked to create a short squeeze on the shares. This occurred in late January and is poised to repeat as laid out in this Forbes.com article.
However, the combination of the company selling a lot of shares to shore up its balance sheet and provide cash to survive its business being ground to a halt, with a stock that has been driven much higher creates a situation where the elevator that took the stock up could easily see a return trip down.
Share count has skyrocketed
While the company has taken advantage of a windfall and was a smart decision to help the company survive, its share count has materially increased. At the end of 2020 there were 117.2 million diluted shares, which grew to 400.1 million at the end of March and is now almost at 450 million.
From September to December last year the company sold about 100 million shares and raised $290 million before commissions and fees. This was for an average of just under $3 per share.
In January AMC sold 50 million shares and raised just under $580 million or about $11.50 per share. Combine all these sales with converting debt to equity has ballooned the share count.
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Market cap has therefore exploded
Even before Covid-19 shut down theaters, AMC’s market cap fell by 49% from $1.48 billion to $747 million at December 31, 2018, to December 31, 2019. It fell an additional 67% during 2020 to end the year at $248 million.
However, with the increased number of shares and the stock price now at $26.12 AMC’s market cap is now $11.8 billion. Fortunately, due to the company selling shares it has been able to reduce its net cash position close to where it was at the end of 2019 around negative $4.6 billion.
Why the stock could round trip: Valuation
Before Covid-19 hit the economy in 2020 AMC had lost money and had negative free cash flows two of the three previous years. Trying to use earnings or cash flow as a valuation tool would show exorbitant results and not be of much use. Probably the best metric is market cap to revenue.
- Dec. 31, 2017: $1.58 billion with $5.08 billion in revenue = 0.31x market cap to revenue
- Dec. 31, 2018: $1.48 billion with $5.46 billion in revenue = 0.27x market cap to revenue
- Dec. 31, 2019: $747 million with $5.47 billion in revenue = 0.14x market cap to revenue
- Dec. 31, 2020: $248 million with $1.24 billion in revenue = 0.20x market cap to revenue
To remove the impact of Covid-19 lets use 2018’s and 2019’s revenue, which are essentially the same, of $5.47 billion and Friday’s market cap of $11.8 billion.
May 28, 2021: $11.8 billion with $5.47 billion in revenue = 2.15x market cap to revenue
At the current valuation AMC’s shares are just under 7 times more expensive than 2017’s valuation level. At some point in time reality should catch up what can easily be called an overvalued stock.
500 million shares proposal
In its latest proxy AMC proposed to increase the number of shares that the company could sale by 500 million. While this would essentially double the number of shares outstanding, the key word is “could” since it is under no obligation to actually sale them until needed.
As CEO Adam Aron said in an interview, which is in this SEC filing, he said none would be sold in 2021 and he went through the history of the company taking over three years to sell any additional shares the last time the number of authorized shares were increased. It actually makes sense to increase them as acquisition opportunities may present themselves given the current distress other theaters are probably under.
The proposal caused concerns that the company may substantially dilute existing shareholders. Subsequently, management and the Board decided to remove the proposal from the proxy.