AMC Entertainment (NYSE:AMC) stock has seen a surge of bullish price action in 2023 so far, with AMC stock once again topping the $10 per share level. Many bulls are pointing to AMC’s progress in cutting losses compared to prior quarters, and various bullish box office-related catalysts, mainly boosted enthusiasm around Taylor Swift’s Eras tour selling out theaters.
However, in my view, AMC still requires much more rigorous debate before investors can consider this stock, even at current levels. This is not a business I see as fundamentally sustainable in the long-run due to its inconsistent cash flow generation, heavy reliance on box office momentum from Hollywood, and loss-making business model. There is a lot more to unpack about this business, especially after the peculiar creation of the new APE preferred stock last year.
The Biggest Problem With AMC Stock? Crushing Debt and Dilution
Clearly, AMC is having a ton of trouble trying to raise capital and dig itself out of the massive $9.5 billion debt pile it still sits on, with just $435 million in cash on hand as of last quarter. The company’s interest payments on this towering debt load are crushing the company, and AMC has had to engage in considerable share dilution at discounted prices over the past year to repay portions of this debt and continue normal business operations.
Of course, AMC can survive for years if retail investors continue to step up and prop the share price up when needed, providing capital to management. The company can also survive if it finds other creative ways of securing funding, like asset sales.
However, I do not believe this is a sustainable business model for the long-run, as there is simply no clear path back to consistent profitability on the horizon yet. Some would argue that AMC’s losses will eventually be substantially reduced, once interest rates ease and the Federal Reserve pivots from its hawkish monetary policy stance. Personally, I find that argument lacks merit since the Federal Reserve has clearly signaled that it would likely need to keep interest rates at restrictive levels for a prolonged period of time, especially as we have continued to see the U.S. economy perform quite well in recent quarters.
No Respite for AMC Stock Even if Rates Fall
And still, even in a scenario where the Federal Reserve did suddenly start cutting interest rates again and easing policy, I do not believe it would reverse the long-term prognosis for AMC completely. That’s because the core issue is that even if you exclude these debt interest payments, the AMC business itself is still burning significant cash on an operating basis annually.
In my view, this is the biggest fundamental red flag and issue here. It signals that AMC needs to make some serious adjustments to its business model and operations for any hopes of achieving consistent long-term profitability down the line. Relying on momentary hype cycles like the recent wave of Taylor Swift fans won’t be a repeatable phenomenon forever. So, eventually, I expect AMC will return to posting lackluster loss-making figures in a quarter or two, in line with its usual performance when you pull back the lens.
Very Few Realistic Options Remain for AMC Stock
The conclusion I keep coming back to is simple: AMC has frankly no realistic way out of the deep hole it has dug itself into over the past decade, at least from what I can observe. It simply has too much debt relative to its cash-generating capabilities and cash reserves to keep burning through $742 million of cash every twelve months.
Yes, AMC can survive for a few more years if management continues to reduce its footprint and cut costs. But where will this company realistically be in five years or ten years if it fails to achieve consistent profitability?
In my opinion, the only ways I can envision AMC actually getting out from under this towering debt load any time soon is if either:
Another much more massive company or entity comes along and acquires AMC, taking this debt load onto their own books. Or, lightning somehow keeps striking at the same place over and over, with new viral trends and memes consistently spiking AMC’s ticket sales, cash flow, and share price every quarter.
Of course, both of those scenarios seem highly improbable to me currently. Moreover, as mentioned, the Federal Reserve has made it abundantly clear that markets should expect restrictive high interest rates to persist for the foreseeable future, barring an unexpected severe plunge in the economy or forced pivot.
And still, even in a fantasy scenario where the Fed suddenly cuts rates again, I do not see that providing much, if any, true respite for AMC Stock, or the company’s unsustainable financial position. Because at the end of the day, this company needs to fix the core profitability issues with its underlying business model and operations to survive, regardless of interest rates or viral meme stock rallies.
The Bottom Line
In summary, while I respect the recent bullish price action and meme enthusiasm, I simply cannot, in good faith, recommend investing in AMC stock near $10 per share at the moment. In my view, survival does not automatically equate to a sound long-term investing thesis.
AMC needs to adequately address its core business model and profitability issues first before becoming investable again. Its decisions and financials of the past few years point in a downward trajectory. Thus, in my opinion, the recent momentary meme-fueled relief rallies we’ve seen in 2023 so far may be getting long in the tooth.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
