2021 has been an exciting year for retail investors. Following the infamous short-squeeze on GameStop‘s share price, AMC Entertainment (NYSE:AMC) has become the new darling among speculators. Over the last 12 months, the AMC share price is up over 400%. And year-to-date, the stock price has surged by 12 times. That’s some extraordinary growth. But is this a bubble about to burst?
The bull case for the AMC share price
Ignoring the influence from speculators buying to profit from the short-squeeze, there are some reasons to be optimistic about the long-term potential of the AMC share price. And one of the main ones is the reopening of the US economy.
Much like here in the UK, for a prolonged period of 2020, cinemas around America remained closed. This decimated the firm’s gross income, with total revenue falling to $1.24bn versus $5.47bn a year before. Fortunately, cinemas have now reopened in most states, albeit at a reduced capacity.
So the money is finally flowing again. And due to the relatively rapid rollout of the Covid-19 vaccine, around 60% of the US population aged 18 and up have received their first dose. This is potentially excellent news for the AMC management team, as an accelerated vaccination rate might enable them to increase their cinema capacity sooner than expected.
Another encouraging sign is the surprisingly stellar performance of Godzilla vs Kong that debuted in March this year. Despite many cinemas being closed worldwide, the film has become the highest-grossing release since the pandemic began. Thus demonstrating large pent-up demand among consumers to return to the big screen experience.
This sounds like it could be time for the AMC share price to make a comeback after the chaos of 2020. But as promising as it seems, one look at the balance sheet made me seriously sceptical over the long-term potential of this business.
Dwindling AMC potential growth
Disregarding the exceptional year that was 2020, the business behind the AMC share price does not look particularly attractive to me. Why? There are a few reasons. First and foremost is the contraction of its industry. Looking at historical data, the volume of cinema tickets sold has been declining since 2002.
Cinema operators like AMC have managed to offset the reduced number of tickets sold by increasing confectionary prices. However, now that streaming services like Netflix and Disney+ are either releasing films directly to their platforms or reducing the window of cinema exclusivity, maintaining growth has become quite challenging.
To overcome this issue, AMC has been employing acquisitive strategies to expand its chain of locations. But this has led to an enormous build-up of debt that has pushed it to the brink of bankruptcy. In 2019, AMC had over $4.8bn of debt on its balance sheet that meant a $317m interest bill in 2020. That’s nearly three times more than the firm’s operating profits. And last year, this level of debt increased by a further $1bn.
The management team is now turning to investors to raise additional capital to keep its lights on. And so, with a shrinking market size, an enormous pile of loan obligations, and a massive amount of equity dilution ahead, the AMC share price definitely looks like a bubble waiting to burst, in my opinion. Therefore I won’t be adding the shares to my portfolio.