AMC Entertainment (NYSE:AMC) is among the top global theater chains many investors have ignored for its underlying business model.
Indeed, most retail investors in this name are investing not for the company’s fundamental growth prospects or its outlook moving forward. Those are rather negative.
It’s the company’s upside potential as a meme stock, and its corresponding short-squeeze potential, that drives most of the discussion around this name.
While AMC has certainly seen many near-term surges over the past few years, there’s a reason why the trend has remained negative.
Here’s why I think cautious is advised for investors seeking a high-upside growth opportunity in this current environment.
What Jim Cramer Has to Say
Among the talking heads many investors don’t pay much attention to, Jim Cramer has been outspoken about many names during the previous incredible meme stock rallies we’ve seen.
On the meme stock front, he’s been largely right, suggesting investors ignore names such as AMC right now.
Interesting, Jim Cramer recently noted a paradox among bullish investors. Such investors seek a slowing economy with rate cuts and strong demand to shield their firms from risks like the yield curve.
Despite economic weakness, some companies have thrived. Cramer highlighted the manufacturing slowdown, with the ISM index falling to 48.7 in May from 49.2 in April, marking the 18th contraction in 19 months; he found May’s new orders decline particularly concerning.
Cramer advised buying oil and gas stocks, expecting a rebound in the economy. He also noted strong retail performances from major retailers and cyclical names, which he found unexpected.
As a bear on AMC and the meme stock movement, his recommendation is to sell, as there’s simply not enough in the way of fundamentals to support this recent rally. Here, I have to agree with Cramer on this one.
AMC is Similar to GameStop
AMC Entertainment, following GameStop (NYSE:GME) as a top meme stock, lacks GameStop’s recent improvement in per-share losses. To many investors, this shows a less-promising recovery path.
To raise funds, AMC has engaged in multiple dilutive share offerings amid low moviegoer turnout. The company is diversifying into puzzling endeavors such as AMC-branded candy, citing extensive R&D with confectioners, despite ongoing financial challenges.
I’m not sure these investments will pay off, and it’s unclear what the ROI will be on these moves.
I think this strategy raises questions about prioritization, especially as AMC continues to report significant net losses without year-over-year improvement.
Until the company focuses on creating a business model that can be cash flow positive and show accretive earnings growth, this is a name to steer clear of.
Sell AMC Stock Before It’s Too Late
It’s my long-standing view that the movie theater model has officially been broken.
Consumers just aren’t watching movies as they previously have — we’ve entered a new era of entertainment, one that’s driven by streaming and at-home offerings which are better than visiting the cinema.
Yes, AMC has seen some recent strength in its blockbuster movies and foot traffic metrics. But despite record recent volumes, there’s simply not enough here for investors to jump aboard and buy into this flailing business model.
Over the long-term, I expect AMC stock to trend toward zero. Short squeeze enthusiasts and meme stock traders have only delayed the inevitable.
I think investors who want to position their portfolios for success may want to steer clear of this stock altogether right now.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.