Entertainment group AMC Entertainment (NYSE: AMC) has been a roller-coaster ride in recent years. After a meteoric rise in 2021 fuelled by the ‘meme stock’ frenzy, the company’s share price has fallen away significantly. But with recent box office successes and a renewed enthusiasm in meme stocks, investors are wondering: is AMC stock on the move again?
The business
The entertainment industry, heavily impacted by the pandemic lockdowns and streaming service dominance, has shown tentative signs of recovery. Summer blockbusters and a swell of new releases following the pandemic have brought audiences back to the big screen, bringing a much need boost to revenue.
However, financial health remains a major concern. The company accumulated significant debt during the pandemic to stay afloat. While steps have been taken to reduce it through stock offerings, the burden is still substantial. This debt limits the ability to invest in upgrades and new technologies, which could be crucial for attracting customers in the long run in a competitive landscape.
Interestingly, a discounted cash flow calculation suggests the share price could be as much as 56% undervalued. However, with such a drop from the peak, I can fully understand why the market would be hesitant in trusting any one metric to make a decision.
Fundamentally, the business is still unprofitable. With this unlikely to change any time soon, the share price may have some further declines ahead, unless the events of 2021 repeat themselves.
The meme influence
The meme stock phenomenon of 2021, where retail investors banded together to drive up share prices, played a significant role in AMC’s story. While it provided a much-needed financial boost, it also led to high volatility and a disconnect between the stock price and the company’s fundamentals. This volatility continues to make this a risky investment, since traditional metrics such as the price-to-sales (P/S) ratio seem to matter less to some.
With Keith Gill, one of the key players in the 2021 Gamestop frenzy, now back in the public eye, meme stocks have seen tremendous rallies in the last few days. Many have now declined significantly, but volatility is certainly back on the menu.
The next move
As we learned in 2021, the next move for these stocks is almost impossible to predict. There may be ferocious rallies ahead, but the declines can be just as aggressive. Clearly the business itself is in a difficult position, but the influence of online communities to move the stock price is a whole other animal.
For me, I don’t want to touch AMC stock. I vividly remember the frenzy and chaos from 2021, and as much as many investors will do well with some luck, I don’t want to fall into the trap of chasing a rally, and potentially only seeing the decline.
