AMC Stock: Shorts Are Running for Cover

AMC Entertainment Holdings Inc (NYSE: AMC) is screaming for the top in the market this morning, gaining more than 100% in the premarket hours as the short sellers run for cover. The gains come after the company took bankruptcy off the table, raising nearly $1 billion. Here’s what’s happening:

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AMC Raises $917 Million

In a press release issued Monday, AMC announced that it has successfully raised or signed commitment letters to receive $917 million in new equity and debt capital. The company said that these funds will be plenty to get it through a coronavirus pandemic impacted winter. 

Out of the $917 million, $506 million was raised through equity as the result of the issuance of 164.7 million new shares. The company also secured $100 million in first-lien debt and the issuance of 22 million shares. Finally, AMC said that it executed commitment letters for $411 million of incremental debt capital in place through mid-2023. 

Not only should this money get the company through the rest of the Winter, AMC said that the company expects for the funding to last deep into 2021. 

Management Commentary

In a statement, Adam Aron, CEO and President at AMC, had the following to offer:

Today, the sun is shining on AMC. After securing more than $1 billion of cash between April and November of 2020, through equity and debt raises along with a modest amount of asset sales, we are proud to announce today that over the past six weeks AMC has raised an additional $917 million capital infusion to bolster and solidify our liquidity and financial position. This means that any talk of an imminent bankruptcy for AMC is completely off the table.

Looking ahead, for AMC to succeed over the medium term, we are going to need for much of the general public in the U.S. and abroad to be vaccinated. To that end, we are grateful to the world’s medical communities for their heroic efforts to thwart the COVID virus. Similarly, we welcome the commitment by the new Biden administration and of other governments domestically and internationally to a broad-based vaccination program.

A Short Squeeze In Play

AMC has had a rough go through 2020. With the coronavirus pandemic causing closures around the company, and impacting audiences as the chain of movie theaters started to reopen, many expected that the company would fall into bankruptcy, a concept that wasn’t so far away before the company raised these funds. 

With these expectations, AMC was a heavily shorted stock. 

Nonetheless, with the announcement that the company is clear of bankruptcy, for now, investors started to dive in, leading to sharp gains in value Monday and Tuesday. 

By the after-hours session on Tuesday, the gains had become so strong that shorts started to abandon their positions, buying shares to close out their short holdings. This led to a flood of volume and serious price appreciation in a short squeeze that’s causing the stock to fly up by more than 100% before the bell this morning.

What Analysts Think About AMC Stock

At the moment, analysts aren’t too excited about AMC. According to TipRanks, there are five analysts currently covering the stock, four of which rate it a Hold and one that rates it a sell. 

Price targets on the stock range from $1.55 per share to $5.50, with a median price target of just $2.89, representing a potentially significant downside. 

It’s important to keep in mind that these analyst opinions were outlined prior to the company’s fundraising announcement. As such, the analysts likely thought the company was on a fast track to bankruptcy when setting these ratings. With the recent announcement, I’m expecting that as these analysts review their calls, upgrades and increased price targets will be the result. 

Risks to Consider Before Buying AMC Stock

Investing comes with risk, and that statement is no more true than it is with AMC stock. The fact of the matter is that the company is far from out of the woods. Before investing in the stock, you should consider the following risks:

  • COVID-19 Is Changing. New strains of COVID-19 are popping up. With that in mind, the pandemic may still be a long way from over. If the pandemic doesn’t end quickly enough, the $917 million won’t be enough to get the company to the end of the hardship. As a result, more funds may need to be raised and a potential bankruptcy down the line isn’t 100% off the table quite yet. 
  • A Change In Habits. Consumers are habitual creatures. Being stuck inside for an extended period of time has likely changed entertainment habits. So, even when the pandemic is over, it may take some time for consumers to start religiously going to movie theaters again, which could result in significant declines. 
  • Streaming. Finally, as a result of the COVID-19 pandemic, new releases have become available for streaming, rather than only available in movie theaters. Some suggest that this trend will continue long after the pandemic is over. Should this be the case, it will likely cut deep into AMC revenues for the long haul. 

Final Thoughts

While every investment you make comes with risk, things are looking up for AMC. Sure, COVID-19 may become a long-term issue. However, it’s possible that the vaccines being shipped out and stuck into arms across the United States and around the world will get the virus in check. 

At the moment, AMC has the money it needs to get through several months. During these months, I believe that the COVID-19 pandemic will fade and consumers will start going to theaters yet again. While this is a speculative bet, if I’m right here, we’re in for a tremendous recovery in AMC stock.