AMC’s stock almost doubled on Wednesday with the shares increasing from $32.04 to close at $62.55 (with an intra-day high of $72.62) with the main catalyst being the company announcing a way for individual investors to receive updates and free offerings from the company. The first offer is a free large popcorn when attending a movie at an AMC theatre this summer. The stock added about $14 billion in market cap by giving away tubs of popcorn that probably cost it $0.50 or less to make.
Keep in mind that AMC’s market cap has increased from $248 million at the beginning of the year to $28.2 billion, a surge of 11,236%.
Another point to note is the huge trading volume in the shares. There are about 460 million shares outstanding but over the last four trading days the average has been 648 million trading hands and Wednesday the volume was over 745 million.
Smart move by management to sell stock
Yesterday AMC sold 8.5 million shares at $27.12 a piece and raised $230.5 million. This diluted existing shareholders by less than 1.7% vs. over 7% if the same number of shares had been sold at the end of last year and would have raised a lot less money. This was a smart move by management to use an inflated stock price to give it cash to either acquire theaters or pay down debt.
In hindsight it would have been even better to wait a day, but it is easy to armchair quarterback after the fact. This did help the stock move from $26.12 to $32.04 on Tuesday, but the main fireworks were today.
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Debt seems to be manageable
At the end of 2020 AMC had $5.4 billion in debt. While that is a large amount, only $418 million is due between 2021 and 2024, with over half ($238 million) due in 2024. There is $618 million due in 2025 but the remaining bulk of $4.4 billion is due in 2026 or later.
However, valuation makes no sense
Benjamin Graham, the father of value investing, said that in the short-term the stock market is like a voting machine but in the long-term is a weighing machine. Having any stock almost double over what is a minor company announcement shows how disconnected stock prices can become from their business.
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 Wednesday’s market cap of $28.2 billion. Keep in mind just two days ago AMC’s market cap was $11.8 billion. It has increased by 139% in just two days.
- May 28, 2021: $11.8 billion with $5.47 billion in revenue = 2.15x market cap to revenue
- June 2, 2021: $28.2 billion with $5.47 billion in revenue = 5.15x market cap to revenue.
At the current valuation AMC’s shares are over 16 times more expensive than 2017’s valuation level of 0.31x market cap to revenue. At some point in time reality should catch up what can easily be called an overvalued stock.