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AMC stock is surging! Is this a good or bad investing opportunity?

by | Last updated 27 Nov, 2022 | Consumer Discretionary

Key Points

  • AMC stock grew by more than 1000% in 2021.
  • The company’s financials have improved in the form of increased revenue.
  • Reopening the theatres was a daunting task for this business.

The movie theatre company AMC Entertainment Holdings (NYSE:AMC) was among the most popular meme stock of 2021. The tumultuous journey of the AMC stock from under $10 to $59.26 made most Wall Street analysts go speechless. This unexpected growth resulted from the manipulation of some retail investors from the social media site Reddit.

But since the start of 2022, shares have picked up a bearish trend. During the current year, the price of AMC stock has dropped from $27.2 to $14.3. But quite recently, this trend has somewhat reversed, and shares now trade at around $18. Is there a new wave of exponential growth of this meme stock? And should I be considering it for my portfolio?

Will AMC stock continue to rise?

AMC experienced a serious financial crunch, due to the pandemic, up to the extent of potential insolvency. In my opinion, this deliberate manipulation of the stock was nothing but a game-changer for the company. And it’s ability to raise capital using its elevated share price ultimately brought it back from the brink of bankruptcy.

Without a doubt, the financials of the group has started to improve. The revenues for the full year 2021 were reported to be $3.1 billion, a 9% improvement from the previous year. In addition to this, operating income also improved by 11% to $490 million. Combining that with the nine million aggregate paid streaming subscribers is no less than an achievement for the firm! At least, that’s what I think.

The exponential growth of the AMC stock during the first half of 2021 was undoubtedly triggered by the meme craze. And the valuation divorced from fundamentals, I wasn’t surprised to see this momentum reverse once the hype died down.

But now, the company is standing on the more solid grounds of increased revenues and improved liquidity. And that does open the door to potential future growth for AMC’s stock price.

Challenges along the way

No doubt, the reopening of movie theatres is good news. But it also brought a huge set of challenges for the theatre business owners. Not only reopening the theatres was itself a challenge, the labour shortages and supply chain disruptions further added fuel to the complications.

Food and beverage is a significant revenue-generating segment of this business. And reopening the theatres with a full-blown menu item was a challenge the company was not ready to handle.

Meanwhile, there remain significant financial hurdles for AMC to overcome. Yes, cash flows are beginning to recover, but there remains a large $5.5bn pile of debt to contend with. With interest rates on the rise, this debt burden could put a lot of pressure on profitability.

Will I be investing in AMC stock?

If I was asked this question last year, my answer would have been a straight no. Shares grew significantly in 2021, but from an investment point of view, it was a dangerous territory to tread in.

Today, the story is different. This time the growth of AMC stock seems to be at least partially supported by actual improved fundamentals and operations. Moreover, with the theatre business back on track, the company is expected to generate increased revenues in the future.

I don’t expect the stock price of AMC to grow as it did in 2021. However, I am bullish on its long-term capabilities. Therefore, I’m considering adding a few shares to my personal portfolio.

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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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