AMC Entertainment Holdings (NYSE:AMC), America’s favorite meme stock, caught another bid in the back half of March as shares appreciated from $13.40 on 3/14/22 to $20.24 at the close of trading on 3/25/22. Putting AMC’s valuation of $10.45 billion aside for a moment, everyone should tip their cap to Adam Aron, including myself, as AMC delivered a positive Q4 2021. Many of the items from crypto to NFTs have been classified as gimmicks, and questions, if they will draw customers to the movies, remain to be seen. Nonetheless, numbers don’t lie, and AMC certainly looks like it may have turned the corner.
AMC is an enigma because its shareholders have an intense level of loyalty to its stock that many are willing to sit on their shares almost indefinitely. I don’t believe AMC’s story has ever been about their solvency but rather their ability to generate large amounts of profits for their shareholders. When I say profits, I don’t mean from the stock appreciation. I am referring to the profitable metrics on their financial statements, including EBITDA, Free Cash Flow (FCF), and net income. The movie industry has never been a huge profit center for the theater business, and this is proven in AMC’s financials. These days it seems like AMC is trying to cast its net into different verticals, from a popcorn business to issuing NFTs and accepting crypto to generate business. AMC has also made a recent investment into Hycroft Mining (HYMC) as they purchased 22% of this mining company. I will certainly give credit where credit is due, and Mr. Aron deserves a lot of credit at this point. During an unprecedented period, he navigated the ship, utilized the tools at his disposal, and kept AMC afloat long enough to ride out the storm. The real questions are whether the market is still overvaluing AMC, and what is their realistic ability to become the company shareholders envisioning?
On an annual basis AMC’s financials look like a disaster, but looking at them on a quarterly view tells a different story
There are no two ways around it; AMC is an expensive business to run, which correlates to a low-margin operation. Historically, over the previous decade, AMC has turned a bottom-line profit on net income 6/10 times, with its largest amount of net income being generated in 2013 of $364.4 million. From an EBITDA standpoint, AMC has been profitable 8/10 times, with 2018 being its largest year of EBITDA as they generated $847.1 million. Up until the pandemic, AMC’s cash generated from operations was increasing, but its actual FCF wasn’t and in 2019 only generated $49.9 million in FCF after producing -$53.1 million in 2018.
There are two problems that many investors have with AMC, and those are that AMC is trading at a higher valuation than it did in much of 2018 and 2019 at the height of their revenues and that AMC is still losing money on an annual basis. Even when times were good in 2018 and 2019, AMC was still a low-margin business. In 2018 AMC generated $1.03 billion in gross profit, placing its gross profit margin at 18.81%. AMC generated $110.1 million in net income for the 2018 fiscal year placing its profit margin at 2.02%. A 2.02% profit margin is very small in any business, especially in a business where you’re generating $5.46 billion of revenue in that fiscal year. 2019 has been the year that many base AMC off because it was the height of their revenue with $5.47 billion and the last full year not impacted by the pandemic. In 2019 AMC saw its gross profit decreased to $918.6 million, causing its gross profit margin to decline to 16.79%. AMC posted a negative bottom-line profit of -$149.1 million off $5.47 billion in revenue. With the number of investment options in the market, it’s fundamentally hard to justify investing in a business where its cost of revenue exceeds 80% of the revenue it generates. On an operational basis, before you account for interest expenses and other taxes, the long-term track record of AMC’s operational expenses isn’t flattering as it takes too much to run the business.
I understand one of the main arguments is AMC’s cash position, and I am not indicating they will go under, rather than their cash position may continue to decline as it offsets losses. AMC’s cash position at the end of 2021 compared to 2020 certainly is much stronger as it grew by $1.28 billion (416.54%). One of the problems is AMC’s cash burn, as it peaked at $1.81 billion in Q2 2021. Over the next 2 quarters, AMC’s cash position decreased by $218.7 million or 12.07%. A declining cash position isn’t AMC’s only problem on the balance sheet. Investors are looking past the $5.4 billion in long-term debt and AMC’s negative equity position. Yes, they are flush with cash for the time being, but AMC’s total equity is -$1.79 billion, which is a problematic indication. For some investors, exiting their position in AMC isn’t part of the equation, but the reality is that they are holding shares of a company whose liabilities exceed their assets, with an increased amount of debt as their shares represent negative equity in the company.
When you purchase a stock, you’re buying an equity portion of a company where your shares correlate to a portion of revenue and earnings which the company generates. The other aspect that investors are looking past is that AMC has generated negative earnings since 2019. There wasn’t even a pandemic in 2019, and AMC produced -$1.44 in EPS. For the 2021 fiscal year, AMC generated -$2.66 in EPS. The real question becomes, can AMC do enough to dig its way out of a negative equity position and back into a positive EPS position? If AMC does, what would the valuation be worth, and before you think it’s going to the moon, remember, when you invest in a company, you’re paying the present value for future cash flow. When you start comparing AMC against other companies, you’re getting a lot more FCF for your dollar elsewhere, even if AMC returned to an FCF positive situation.
Contrary to what many thought, Adam Aron was correct, and he has every right to make the statement he made on the Q4 earnings call:
The problem with conventional wisdom is that conventional wisdom is so often just utterly wrong. Remember the breathless reporting that AMC would file for bankruptcy in 2020. Wrong. Remember that otherwise highly respected experts were calling for the AMC share price to fall to $2, $1, or even $0.01 by February or March of 2022. Now for all the lawyers listening in, I’m making no prognosis for the future. I’m looking only retrospectively, but those experts gravely underestimated AMC. And with the full benefit of hindsight, we can now happily say because now it’s a simple matter of fact: they were wrong, they were wrong, they were wrong.
If you look at the quarterly chart I constructed over the past two years, AMC went from generating $1.15 billion of revenue to $18.9 million over six months as the country shut down. Mr. Aron faced the harshest operating environment, and AMC didn’t fold, so he deserves the credit. Depending on what profit metric you use, AMC did return to profitability on an EBITDA level in Q4 2021 as it produced $119.6 million of EBITDA. Patrons are going back to the theaters, and Q4 2021 was the first time in 2 years where AMC’s revenue exceeded the operational costs of running their business. Net income has come a long way and is trending back to a profitability position. The question remains if Mr. Aron can deliver on AMC’s transformation and return to a positive equity and FCF position in the future? If the answer is yes, the next question is, how long will it take?
AMC’s transformation includes Movies, NFTs, Crypto, and Gold Mines, but will it work?
I think the answer to whether AMC’s transformation works depends on the results you expect to see. Mr. Aron was explicitly clear that in 2022, 2023, and beyond, he expects AMC to become something much greater than solely a movie theater operator. When I see statements like this, I cringe because I think about the number of companies who have ventured into different businesses and had to cut ties with their plans. AT&T (T) is a perfect example as they are now spinning off their WarnerMedia division. The difference is that T could continue to operate WarnerMedia internally as they continuously generate $25 billion-plus of FCF. They are spinning it off because they feel it will generate the most value for shareholders. Regardless of the reason, T generates tens of billions in FCF and is exiting its strategy of operating in multiple industries. AMC’s latest investment in HYMC came from left field, and they now own a 22% stake in a gold & silver mining company.
In Q4, AMC became the first movie theater to collaborate with a studio partner to offer an exclusive NFT to reward their customers. The Spider-Man NFT was created in collaboration with Sony, and 86,000 NFTs were fully subscribed within hours. AMC is now working on other separate NFT programs, including one for The Batman. More than 800,000 NFTs have been made eligible by AMC for consumer collection. The question is, how do you quantify this as a success? I think it comes down to revenue. Only time will tell if the NFT angle will be a success. I think the NFT aspect has more potential than AMC’s crypto idea because people love collectibles.
AMC has been at the forefront of accepting crypto as payments. In 2021 they added the capability to accept Bitcoin (BTC-USD), Ethereum (ETH-USD), Bitcoin Cash (BCH-USD), and Litecoin (LTC-USD) through their website and mobile app. AMC is adding the ability to accept Dogecoin (DOGE-USD) and Shiba Inu (SHIB-USD) by the end of Q1 2022. I don’t believe it adds value, and it could work out horribly for AMC. The idea of crypto is to have a decentralized form of currency that a central government doesn’t back, and many look at cryptocurrencies as appreciating assets. The U.S. dollar is not an appreciating asset. $1 will always equal $1 the only appreciation or depreciation is the purchasing power that $1 equates to. People who buy BTC-USD or ETH-USD are not buying them to spend at AMC; they buy them because they believe these cryptocurrencies will appreciate value. I don’t believe many customers will pay with crypto. Let’s say I am incorrect, and they do utilize crypto, and AMC ends up having 5% of sales come from crypto. Now AMC is in a position where 5% of their revenue is tied to a fluctuating market that could decrease or increase at a moment’s notice. If customers use crypto as payment during a downturn, the revenue generated could lose some of the value in dollars prior to AMC converting it. It works both ways where AMC could also hold crypto in an appreciating market and make additional profits from crypto’s revenue. I think this is a risk that is more of a publicity stunt, but I could be wrong.
AMC is also offering variable pricing. Personally, I have no interest in going to the movies unless it’s a new James Bond movie or Top Gun 2. I don’t think variable pricing will influence movies that aren’t popular because if someone isn’t interested in The Lost City, regardless of if the ticket is $20 or $10, they probably won’t see it in the movies. I don’t think variable pricing is going to make people who are uninterested in a movie go see it because it suddenly became cheaper. On the other side, I think variable pricing could positively affect popular movies, but at the same time, it could also be a deterrent. Going to the movies can become costly if you’re a family of 4, and if tickets are an extra $5 – $10 each, it could be a deterrent. For others, if they are set on seeing Spiderman No Way Home or The Batman in the movies, they may be willing to pay $5 – $10 more without flinching. I won’t say what I would be willing to pay to see Top Gun 2 in the movies, but that is an experience I can’t recreate to a satisfactory degree at home due to the level of special effects and the way the movie was filmed.
Lastly, their transformation is expanding outside of movies and becoming a holding company of sorts. Maybe we will see AMC start investing in SPACS also. My question becomes, why purchase 22% of HYMC when you can just buy physical gold or silver? Independent third-party studies confirm that the Hycroft Mine has roughly 15M ounces of gold 600M ounces of silver deposits. At a spot price of $2,000 per ounce of gold and $25 per ounce of silver, that’s $45 billion in proved reserves. Here is the problem, it takes a tremendous amount of capital to unearth these reserves and bring them to market. HYMC loses money as it generates negative net income. HYMC isn’t expected to initiate its exploration program until Q4, as financing is still pending.
Why would AMC be willing to take such a large stake in HYMC instead of Barrick Gold Corporation (GOLD), Newmont Corporation (NEM), or Franco-Nevada Corporation (FNV)? These are companies in the gold mining industry with market caps that range from $30 – $62 billion. If HYMC was such a great investment and the economics of its mine were lucrative, why wouldn’t one of the major players take it over, considering HYMC has a market cap of $141.57 million.
Adam Aron deserves credit for weathering the storm and quarterly getting back to an EBITDA positive level. For me, the problem with AMC is that its margins are razor-thin, you have competition from streaming and great household entertainment setups, and AMC barely generated profits during the good times. AMC is a company with negative equity, negative net income, and negative EPS. Maybe AMC’s transformation will be truly transformational, and AMC will start generating profits hand over fist. For now, I don’t see how the vision translates to enough FCF and profits to get back to a positive equity position on the balance sheet. I think AMC is overvalued today, and there are just better places to invest your capital.
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