Skip to main content

AMC to the Moon?


Once again it seems like the internet has united to shoot up the price of a stock. This time around, it’s AMC. As of June 2nd, the stock has soared past the $70 mark. The only question on everyone’s mind is how high will it go, before it starts collapsing?

If you have no idea what’s happening right now, AMC is currently undergoing a ‘short squeeze’. A short squeeze is a very rare financial phenomenon that occurs when there is upward pressure on a stock causing its price to rise. This results in the underlying stock’s short sellers being forced to buy the stock at a higher price and pay the difference between its current stock price and the price they initially sold it at. Short squeezes usually occur when investors collectively feel like a certain stock is over-shorted. In the case of AMC it was shorted at around 19%, and investors retaliated by buying more and more shares of the stock, thus creating upward momentum that will increase the stock price. Now, short sellers have their hands forced, and have to buy the stock at higher prices to mitigate their losses, resulting in even more upward momentum. Similar scenarios have occurred with Volkswagen in 2008, Tesla in 2019, and more recently GameStop in 2021.

Back to the story at hand, AMC stocks started to rally around January of this year, as users of r/wallstreetbets banded together and invested in the stock en masse to force short-sellers to cover their positions and push the stock even higher. On Twitter, #AMCARMY trended on June 2nd, thus displaying the fervor the retail investing public had for Wall Street. This “stick it to them” mentality was prevalent during the whole GameStop short-squeeze fiasco, as retail investors wanted to sabotage institutions with large short positions like Citron Research and Melvin Capital. In the case of AMC, one of the biggest losers is Mudrick Capital, who flipped their 8.5 million shares on June 1st for a tidy profit of more than $41 million. However, if they had held on to their position and sold at the June 2nd peak of $72.62, Mudrick Capital would have amassed another $344 million in profit on top of their estimated $41 million. AMC short sellers, Ortex, reported a loss of $1 billion on June 1st. Overall, the more than 1,110% stock jump since January has defied all expectations.

Aside from benefiting from the huge stock rally by retail investors, AMC has benefited from the reopening of the US economy as the pandemic has simmered down. Other stocks like airlines, cruise lines & hotel companies have seen their stock resurge during this “reopening trade”, but with substantially less volatility than with meme stocks like AMC. Analysts like Chad Beyon from Macquarie said that , "Memorial Day weekend box-office we thought, was pretty encouraging.” He cited movies like A Quiet Place II having solid performances as an example of how ,“there is still demand for the consumer to go back to the box office.” Beyon also notes the rally behind AMC’s bonds, which has increased from 5 cents to 0.97 cents, has allowed AMC to free up some additional capital. Perhaps with the additional capital, AMC will pursue M&A deals, such as buying certain theater chains. Jim Cramer, host of CNBC’s Mad Money, explained, "What Adam Aron (CEO of AMC) is doing is brilliant," Cramer said. "He's growing the company and has shares he can offer to buy any theater chain in the world and I think he's going to do that."

Financial analysis from Forbes using Price to Sales (P/S) ratios shows that AMC’s current ratio is $11.8 billion with $5.47 billion in revenue = 2.15x market cap to revenue, whereas it’s 2017 value is $1.58 billion with $5.08 billion in revenue = 0.31x market cap to revenue. P/S ratio essentially looks at how much the market values every dollar of the company’s sales, where the lower the ratio the more attractive an investment is. At that valuation, AMC shares are just below 7 times more expensive than 2017’s valuation level. It is quite apparent that the P/S ratio is very overvalued and will eventually crash back down to Earth. It seems that Forbes has hit the mark: as of June 5th, the after-market price of AMC is currently $43.91, a percentage decrease of approximately 40%. On the other hand, it could be perhaps that AMC filled to sell 11 million shares on June 3rd, which immediately resulted in the stock price dropping 4% in the same day. AMC announced that they had completed its new stock offering and garnered $587.4 million in additional capital. This additional capital could potential be used to pay off existing debt and/or acquire theater assets through M&A dealings. AMC went on to declare, “We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last... Under the circumstances, we caution you against the investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” This statement clearly shows the risk involved in this situation, as similar to the GameStop debacle, there will be retail investors who will be the last one left holding the bag, thus taking significant losses as a result.

A rather odious clip of a CNBC’s Fast Money, shows the segment’s host, Melissa Lee, hinting at the fact that there are currently naked shorts out for AMC. A naked short is essentially shorting against a non-existent stock, and can occur due to severe negligence at the hands of financial institutions or even done intentionally. If true, these naked shorts, can be another additional factor in AMC’s downward trend. What remains evident is that this story is far from over.  


Popular posts from this blog

Apple Multiples Valuation

Unlike a traditional DCF model, doing a multiples analysis with comparable companies is a lot easier and quicker to do. The four companies I used to compare with Apple are: Microsoft, Amazon, Netflix, and Google. I used Microsoft because Apple and Microsoft are competitors in the field of hardware, mainly computers. Amazon and Apple are comparable because they're both tech giants in their respective fields and even have services in common such as Amazon Prime/Apple TV and Siri/Echo. Similarly, Netflix and Apple compete with each other in regards to their streaming services. Google and Apple both produce hardware like  home-pods, phones and computers, despite Apple being considerably larger.  The multiples that I used for the valuation are: EV/Sales, EV/EBITDA, EV/EBIT, and P/E. EV is the Enterprise Value of a company, which can be calculated by subtracting cash and cash equivalents and adding total debt to the Market cap. EV is the true value of a company while taking into account

DCF Valuation - Netflix

Time to put everything together with this blog post looking at DCF for Netflix. In the case of WACC, I got a percentage of 12%. I still have difficulties calculating it, so I know I need to improve on that front.  Conclusion: Netflix stock is overvalued at 12%. I think in order to make my analysis more effective I can include a What-If analysis that includes a variety of WACC and perpetual growth rate percentages. 

3-Statement Model - Netflix

To be honest, this was a lot more time consuming than I thought it would be. But, I'm glad I got it done. First thing to note with this 3S model is that it was designed specifically to integrate with a DCF Valuation, which will be shown in the next blog post.