One of the world’s largest theater chains, AMC Entertainment Holdings, Inc.'s (AMC) shares soared in price in January 2021 amid a meme stock frenzy. It also surged to hit its all-time high of $72.62 on June 2, 2021, and has gained 1,761.3% year-to-date to close yesterday’s trading session at $39.46. 

As of September 30, 2021, the company operated 100% of its domestic theaters  and approximately 99% of its international theaters.

However, the stock is currently trading 45.7% below its all-time high. Its shares have lost 5.6% in price since the company reported its third-quarter earnings on November 8. AMC’s  top line increased in the quarter, and its losses narrowed, but its business did not return to its pre-pandemic level. In addition, AMC’s CEO, Adam Aron, sold 625,000 shares yesterday for roughly $25 million. So, the stock’s near-term prospects do not look very promising.

Here is what could influence AMC’s performance in the near term:

Increased Competition from Online Streaming Service Providers

With most movie theaters closed amid the COVID-19 pandemic and with people avoiding crowded theaters, online streaming services have dominated the entertainment space over the last year. According to a ReportLinker report, the global market for OTT Devices and Services is expected to reach $217.50 billion by 2026, growing at an 18.3% CAGR. AMC faces intense competition from online streaming service providers such as Amazon.com, Inc.’s (AMZN) Prime Video and Netflix, Inc. (NFLX).

Poor Profitability

In terms of trailing-12-month gross profit margin, AMC’s negative 42.08% is lower than the 51.66% industry average. The stock’s trailing-12-month levered FCF margin is negative, versus the11.04% industry average. Furthermore, its negative trailing-12-month ROTC and ROTA are lower than the 4.28% and 3% respective industry averages.

Unfavorable Analyst Estimates

Analysts expect AMC’s revenue to increase 87.3% year-over-year to $4.66 billion in its fiscal year 2022. However, the company’s EPS is expected to remain negative this year and next year. And its EPS is expected to decline at a rate of 217% per annum over the next five years. In addition, Wall Street analysts expect the stock to hit $11.75 in the near term, which indicates a potential 70.2% decline.

POWR Ratings Reflect Bleak Prospects

AMC has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. Among these categories, AMC has a D grade for Quality, which is consistent with its lower-than-industry profitability ratios.

The stock has an F grade for Value, in sync with its forward EV/S and P/S of 11.78x and 7.77x, respectively, which are higher than the 2.54x and 1.73x industry averages. In addition, AMC has an F grade for Stability, which is consistent with its 1.30 beta.

AMC is ranked #9 out of 10 stocks in the F-rated Entertainment - Movies/Studios industry. In addition to the POWR Rating grades I have just highlighted, we have also rated the stock for Sentiment, Growth, and Momentum. Get all the AMC ratings here.

Bottom Line

AMC was not doing very well even before the pandemic. Its revenue has declined at a 34.7% CAGR over the past three years and at a 13.3% rate over the past five years. And even though its number of screens operated increased 20.5% year-over-year to 10,575 in the third quarter, it continues to face intense competition from online streaming service providers. Also, its EPS is expected to remain negative in the coming quarters. So, we think it could be wise to avoid the stock now.

How Does AMC Entertainment (AMC) Stack Up Against its Peers?

AMC has an overall POWR Rating of D, and currently there are no stocks in the Entertainment - Movies/Studios industry with an A (Strong Buy) or B (Buy) rating. Its industry peers, Warner Music Group Corp. (WMG), Cinedigm Corp. (CIDM), and IMAX Corporation (IMAX), are rated C (Neutral).

AMC shares fell $0.06 (-0.15%) in premarket trading Friday. Year-to-date, AMC has gained 1,761.32%, versus a 25.26% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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