Spark Global Limited reports:
US cinema chain AMC is the latest meme stock and is now absurdly overvalued, says Matthew Partridge, Here’s how to play it.
AMC’S problems pre-date the pandemic
Note, however, that even before the lockdowns were imposed AMC was struggling owing to its decision to take on a large amount of debt to expand its business by buying up its competitors at a premium. Even in 2019, the year before the pandemic, the group lost money. While it has taken advantage of the recent surge in price to sell new shares and reduce debt with the proceeds, this problem still lingers.
Meanwhile, AMC’s post-pandemic path to profitability is complicated by the fact that the rise of streaming services such as Netflix is eroding the power of cinema chains in their negotiations with content creators. In addition to producing a lot of top-quality in-house content, the streaming services are also paying large sums of money to buy exclusive rights to the latest films from studios. While most films will probably still debut in cinemas, the traditional three months of exclusivity that was the norm pre-Covid-19 looks increasingly under threat, with studios reducing this to 45 and even 30 days.
Perhaps the most compelling reason to be sceptical about AMC is that due to the recent explosion in its share price it looks extremely expensive. Indeed, AMC trades at 5.2 times 2022 sales, compared with a 2022 price-to-sales ratio of less than 0.5 at Cineworld. Even if you take into account the level of debt, AMC still looks a lot more expensive, trading at six times enterprise value (EV: market capitalisation plus debt), compared with Cineworld’s twice EV.