AMC Entertainment Holdings: Should You Enter Today?

Most of us love a quick buck. I confess, I have gained from the recent AMC rally. But at this point, many are wondering if this rally will continue in the coming days.

What is the level of risk you could be facing if you take a position in it now and what is the true intrinsic value of the stock based on its fundamentals?

In this article, I’ll be doing a quick analysis on AMC based on its fundamentals, technicals and how I think this stock could perform in the near future.

What is AMC Entertainment Holdings and what do they do?

Think of AMC Entertainment Holdings (NYSE:AMC) as your local cinema (GV, Shaw etc.). Except that it is currently the largest movie theatre chain in the world with “2,866 screens in 358 theatres in Europe and 7,967 screens in 620 theatres in the United States.”

The company currently generates revenue from both ticket sales as well as the provision of food & beverage on their premises.

Covid-19 restrictions has caused AMC’s revenues to fall by almost 90% since March 2020 last year. To bring readers up to speed, I’ve arranged the key events in a brief timeline blow.

• 18th March 2020 – AMC announced the closure of all cinemas due to Covid-19 in compliance with government guidelines on restrictions on gathering. (Less than 10pax)
• 3rd June 2020 – AMC announced that it had “substantial doubt” that it would remain in business.
• 20th August 2020 – AMC announced reopening of selected locations (Not main cities such as New York, San Francisco etc.)
• 13th October 2020 – AMC reported that its existing cash resources “would be largely depleted by the end of 2020 or early 2021.
• 26th January 2021– AMC stated that it had raised $917 million in new funding, including $506 million in equity and new common shares, and commitments for $411 million in debt financing.

AMC was facing the “most challenging market conditions in the 100-year history of the company”, but cited progress on COVID-19 vaccinations, decisions to allow cinemas in New York City and Los Angeles to re-open, and a “significant” number of upcoming blockbuster films as signs of optimism

Adam Aron, CEO of AMC on March 2021

Fast forward 1 year and 3 months, AMC’s share prices had shot up 2750% YTD.

Why did AMC stock go up?

Short answer: redditors and the meme stock army.

Let’s face it, investors have gotten crazy rich from the recent meme stock rally.

It’s real and the media likes to romanticise it as a classic David vs Goliath scenario where small retail traders are ganging up and winning against large hedge funds, forcing them to close their shorts.

With so much media attention on the recent rally, I’m certain that many readers here have been tempted to take a position. Personally, I feel that it is acceptable to take such risks if you are in control of a solid trading plan with a stop-loss set below a specific support level.

Stop-loss orders exist for a reason. We can see from this headline that even hedge funds observe strict rules when it comes to trading.

Mudrick’s flagship fund lost about 10% in just a few days as a jump in AMC’s stock price unexpectedly triggered changes in the value of derivatives the fund held as part of a complex trading strategy, people familiar with the matter said.

AMC Bet by Hedge Fund Unravels Thanks to Meme-Stock Traders – Updated June 11, 2021

My guess is Mudrick probably has a trading plan where they cut their losses when the falls below 10% of their entry point.

This is an example of a solid trading plan. They could potentially lost a lot more, if they did not stick to it.

AMC’s Fundamentals

It is safe to say at this point that AMC is now trading at a level that is purely speculative.

AMC’s Earnings

If we take a brief look at its fundamentals, it is clear the company has made massive losses in 2020 due to the pandemic.

However, what has caused an increase in momentum for this stock is its quarter-on-quarter performance which indicated a narrowing net loss from Q1 2020 leading up to Q1 2021.

AMC’s Price to Earnings (PE)

While AMC has generated some profit in the past, its PE has always been close to zero.

With their revenue taking a further hit from Covid-19, its PE had fallen to -8 at one point. AMC’s PE shows no sign of recovery even as theatres start to reopen.

What the charts say about AMC?

Let’s take a look at AMC from the POV of their technicals.

With the stock being consistently over bought, traders would find that both RSI and moving average are relatively less reliable.

What I have found to be more reliable are beginner technical analysis techniques such as the plotting of structural support levels:

In the diagram above, I’ve identified a short-term structural support level (Blue Line) at the $42-$43 price point where we see investors buying up at this level in the past 2 weeks (Blue Arrows).

With this, it is safe to say that in the short-term, traders have found “value” in taking a position at this price point.

If we look at resistance levels, we have a linear resistance line forming.

We see the price making a series of lower highs (Purple Line) on the 2-hour chart with the highest being $72.62 followed by $68, $60 and as of last Friday’s closing, it was at $49.40.

With the structural support level (Blue Line) holding at $42-$43, it indicates to me that there could be a possible descending triangle (Orange Triangle Overlay) forming. This means prices are making lower highs against a consistent support level.

Traders can choose to interpret the chart differently.

If the price breaks out of the linear resistance line, it could be seen as a bullish move to the upside.

On the other hand, if the price continues to find support at $42-$43 while remaining within the boundaries of the linear resistance line, this would confirm the formation of descending triangle. Major moves to the upside/downside can be expected at its apex.

Where will AMC go from here?

In normal circumstances (before this short squeeze), I would categorize AMC as a cyclical stock along with other hospitality/travel/cruise-related stocks. These stocks would do better as the Covid-19 situation improves.

We can also observe how AMC’s announcement on theatre reopening have cause the stock to increase by almost 2x in a month.

Needless to say, the status of the pandemic plays a huge role in the stock price of AMC.

Bull Case Assumptions

If investors are looking to hold a long term position on AMC and ride out the volatility, the following circumstances could contribute to AMC’s bull case:

1. America’s control over Pandemic: Given the vaccination progress and allowing for cinemas to operate without restrictions, if US shows a confident control over the pandemic situation, this would be the best scenario for AMC.
2. Pent-up Demand: Assuming that cinema-goers will flock to the theaters without hesitation.
3. Weakness in Video Streaming: Assuming that consumers will prefer watching box office showcases in cinemas rather than on video-streaming platforms.

Conclusion

In my opinion, there are far too many variables at present to indicate that AMC will remain bullish on a longer-term horizon. Even the bull case scenario which I presented above is speculative at best.

I think that traders can ride the volatility for quick gains with strict stop losses in place however it is unlikely that recent price movements indicate a legitimate reversal.

It was fun when it was $8-$10 but at such levels, I’ll just enjoy the popcorn from a distance. #nopuntintended