An unorthodox trading strategy to take advantage of a major short move in AMC Entertainment (NYSE:AMC) stock sparked a near-perfect rally in January 2021.
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AMC is a good example of how stocks like this will still maintain their value in the face of potential headwinds when they have Reddit support.
The mistake that AMC investors might make is believing in the durability of the stock with blind faith. AMC does have some red flags that may cause investors some concern. However, the firm has done a lot of good lately and should be more than worth your investment.
As an investor, you may lose money on your stocks. You should assess if this is a risk you are willing to take. AMC is perhaps one of the riskiest stocks out there.
With such high uncertainty, there’s little chance that AMC can sustain its profits over time and maintain an inflated market cap as well, which means you may see more people leave or sell their shares due to fear rather than believe again soon enough.
If you’re looking to invest in the stock market, I strongly consider avoiding this company. The recent price drop is not an invitation for people who want a big reward quickly. Instead, it’s just another sign that they might be headed down a less-than-ideal path.
AMC Will Live to Fight Another Day, But at a Cost
Revenue for the movie theatre chain disappeared when the pandemic came in 2020. The debt levels were extremely high and looming bankruptcy became a real possibility.
People are making notable profits in “Meme stocks” this year for a good reason. It’s easy to invest in them too.
Average Joes who don’t want to deal with the risk of traditional investments are turning to these companies instead – and they’re doing well. Reddit investors maintain the company will never go down — their faith allows them to continuously ride on the success of “the meme stock movement” that has kept this firm’s shares value high and thriving.
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With the new majority owners of this company being small retail investors, it was important to innovate and keep up with trends. One way they did that is by accepting cryptocurrency payments on movie tickets. They also got into non-fungible tokens (NFTs), offering 86,000 Spider-Man NFTs.
When its stock price is diluted, it becomes less valuable for shareholders because the investor loses power when dilution occurs.
Shareholders view this as negative and prefer to have more of it instead of less. In addition, with the increased number of shareholders coming into the picture, their percentage of ownership over the company is shrinking.
Therefore, the company cannot immediately jump to new stock offerings every time it is in trouble.
Spider-Man Saves the Day for Movie Theaters
Investors need to figure out whether a stock remains undervalued or not. The longer they wait, the harder it will be to determine what’s going on and whether it’s justified or not.
If something seems too good to be true, the odds are that it is exactly what it is, and the price will revert towards its previous fundamental value.
As soon as the closing bell rang on Nov. 8, investors were shocked by third-quarter earnings. A net loss of 44 cents beat the consensus estimate and shattered expectations. Revenue jumped 539% and crushed the year-ago sales figures.
Liquidity held steady at $1.8 billion for Q3 and provided the company with ample funds to take steps that could reduce its financial leverage. They are undoubtedly relieved about this, as it helps them feel more confident throughout periods of economic hardship.
Millions of fans have embraced Spider-Man: No Way Home worldwide. It’s brought in more than $1.74 billion in box office revenue, too becoming one of Marvel Studios’ most successful films to date.
You can sometimes get a bump in your share of the revenue based on clout. Even so, when you consider the conservative estimate of only 40% being split among theaters, that probably provides a lot of moolah to be made off Spider-Man. Therefore, revenue for the last quarter is expected to remain strong.
Fundamentals Do Not Bail Out AMC Stock
Though AMC stock was down in the past few months, it currently has an extremely overvalued value and will likely see a major dent soon.
Even if the company looks like it will survive for now, factors such as disruption caused by streaming and studios looking for new ways to survive without theaters could mean the company falls into further issues soon enough.
The performances of other titles indicate a lagging ability for the industry to draw moviegoers out as they once did, with films like Spider-Man keeping exhibitors afloat.
There are a lot of good movies coming out, and several promising new releases have started shaping up. But the recent moviegoing behavior indicates Spider-Man was an anomaly and not part of a trend. Hence, even though AMC got great news with the release of the hit movie, it’s not the reason to buy its stock.
It Is a Bust for AMC Stock
It’s difficult to say whether people will return to the pre-pandemic entertainment habits of the past. The omicron variant has started spreading. It may become hard for theaters in outbreak areas like New York City or Los Angeles.
Despite not having the funds to maintain a successful business, theaters need to spend money on staff, food and utility. They must continually invest in new initiatives as well to make a profit.
AMC struggled with its finances for quite a few years before the pandemic hit. It lost major amounts of cash on the bottom line in four of the past nine years.
AMC’s fixed costs make it difficult for the company to turn a profit, as they may be dealing with losses for years partly because of this.
Insiders are leading the way in the sell-off of AMC stock. Investors should follow the lead of these executives and sell their shares to profit. The decline in the value of these shares is unlikely to let up.
On the publication date, Faizan Farooque did not hold (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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his work on InvestorPlace and TipRanks.
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