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AMC Stock: Investors can’t ignore this red flag on AMC Stock

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AMC Entertainment (NYSE:CMA) the stock market race for glory in 2021 is coming to a swift end this year. Meme trading lost its influence in the markets after several failed attempts to lift AMC’s stock. Hopeful speculators are still holding AMC in the dim hope that the stock will rise again. Yet the latest insider selling is a red flag that shareholders cannot ignore.

Source: QualityHD / Shutterstock.com

In a filing with the SEC, Chief Executive Aron Adam disclosed another sale of 312,500 shares. Although this is a pre-made trading plan under the 10b5-1 rule, CEO Adam’s tweet is hardly reassuring.

AMC stock under pressure

CEO Adam sold another batch of AMC stock, which would contradict the “I’m in” tweet. He’s already sold about $40 million worth of stock before that. He is down to 205,086 shares, plus many more acquired shares. If the shares fall back into the single digits, the CEO won’t lose much since he’s already cashed in.

AMC will struggle to rely on the fundamentals to support its share price. It must first convince the markets that its activity is sustainable. Fortunately, Spider-Man: No Coming Home surpassed the $1.5 billion box office total.

In December, AMC said about 1.1 million people watched the film when it opened. At $13.69 per adult, AMC posted up to $15 million at opening. Yet, with a market capitalization of billions, investors are paying at least seven times the sale price for AMC shares.

AMC still faces two major hurdles.

Two risks

Currently, health organizations do not have an effective vaccine against omicron, the less dangerous variant of Covid. Although people infected with the variant are less likely to need hospitalization, the virus spreads quickly. More and more people are calling in sick for a few days. The airline is facing temporary disruptions due to the virus.

AMC will need several blockbuster films to convince people to go to the cinema. Conversely, people may avoid the cinema until hospitals have antiviral pills to treat omicron.

Studios can work harder to simultaneously maximize movie revenue and increase streaming service subscriptions. This strategy would deter moviegoers from buying movie tickets.

For the benefit of AMC, the studios favor film releases and a delay in a streaming release. For 2022, disney (NYSE:SAY), WarnerMedia and Sony/Marvel will release more films theatrically. After the success of Spider-Man, studies are already planning to release titles on streaming services after a 45-day theatrical window.

Bearish analysts

On Wall Street, analysts rate AMC shares as a “hold” or a “sell.” According to Tipranks, the average price target is around $8.00. MKM Partners is even more bearish, setting a $1 price target on the stock two months ago.

In the most optimistic scenario, readers can construct a 5-year discounted cash flow model: revenue outflow. Assuming a constant 25% annual revenue growth rate, AMC would post revenues of nearly $4 billion by fiscal year 2025:

(USD in millions) Entrance screenings
Exercises ending 20-Dec December 21 December 22 December 23 December 24 December 25th
Income 1,242 1,553 1,941 2,427 3,033 3,792
% Growth -77.30% 25.00% 25.00% 25.00% 25.00% 25.00%
EBITDA -1,067 -225 0 364 758 948
% of sales -85.90% -14.50% 0.00% 15.00% 25.00% 25.00%

Model courtesy of finbox

Even with these assumptions, the model will warn readers that automated checks are failing. AMC needs to move from a nearly 80% drop in revenue to a positive 25% increase in year-over-year growth.

Investors should anticipate that AMC’s customers will return to theaters for years to come. We don’t know if the pandemic will become endemic by then. The model also assumes that movie studios will have at least a handful of blockbusters every year from here.

Related investments

The values ​​of entertainment and communication services such as ViacomCBS (NASDAQ:VIAC) and Comcast (NASDAQ:CMCSA) are trading at deep discounts. VIAC shares are trading at a single-digit price-to-earnings ratio. Comcast’s P/E is in the teens.

disney trades at a forward P/E of around 30x. While the Disney+ service is a long-term growth opportunity for investors, Disney’s theme parks are the prize. Other parks are reopening. As pandemic risks abate, investors are gaining diversified exposure to the entertainment sector through Disney stocks.

Cinemark Holdings (NYSE:CNK) is another movie theater chain that trades at a fraction of AMC’s market capitalization.

Conclusion

AMC’s meme business has come and gone in the last year. the Reddit subgroup can rearrange another rally around the title. Still, the CEO’s huge stock sales will hurt the buy-share movement. AMC should post a profit sooner than predicted by my model. This could regain some market support for its shares.

As of the date of publication, Chris Lau had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Chris Lau is a contributing author for InvestorPlace.com and many other financial sites. Chris has over 20 years of stock market investing experience and leads the do-it-yourself value investing market on Seeking Alpha. He shares his stock picks so readers get original insights that help improve investment returns.



AMC Stock: Investors can’t ignore this red flag on AMC Stock

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