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AMC - approximately fairly valued
Neither the vocal shorts nor the wild "Apes" appear to be right
I made this post on Reddit a few moments ago. While I hammered it out in a few minutes, I spent quite some time thinking about AMC recently. Why? Millions of people seem to care about it, and I’m happy to lend my thoughts to the situation—assuming my thoughts are worth anything at all!
For the last week, I've spent some time on $GME and $AMC. I have some first impressions, which I thought I'd share. I should point out that my views are limited by the amount of time I've spent on the companies, which is about 15 hours for AMC and 5 hours for GME. I generally recommend at least 100, and more preferably, 500 hours of research on a stock before initiating a position.
The TLDR is that both stocks are approximately fairly valued. Most stocks (90% IMO) are fairly valued by the market. The market is quite efficient. If you find yourself unearthing great opportunities every time you look at a stock, you're doing it wrong. Very cheap (or very expensive) stocks only appear rarely, and those opportunities don't last long. In hindsight, it is easy to say "well TSLA was really undervalued for a while." Sure. But the risk-adjusted investment thesis wasn't obvious at that time.
To me, AMC is funny because neither the bulls, nor the bears are exactly right. The bears are missing the obvious: this was a fairly profitable company with an actually decent business model that will return to its former self. Sure, the financials right now are really ugly, but they have weathered the worst of it and have been able to refinance their very expensive paper. With the "apes" in town, AMC should have literally no problem accessing cheaper money. So the stock isn't going to 2: sorry, shorts. I will be sharing models & notes at some point soon.
The bulls also have it wrong, though. The value of the company is limited by the somewhat small and competitive space of box office. US Box office is only so big and AMC's share can only be so big before our favorite useless US government agency squawks about monopoly. So admission revenue can only ever really be 3-4B. Admissions margins aren't that bad, nor is the food & beverage that comes with. The base business is fairly easy to value, and as I mentioned, near-sighted bears forget this simple fact. $800m in EBITDA in 2018 is fairly juicy if we can return to that. I think we will. But, Aron does not strike me as an incredible CEO who can transform or extend the business. The Hycroft deal, in my eyes, is embarrassing and will not result in value creation. The other expansion plans are more reasonable but still risky. If you think Aron can pull off multiple expansions into adjacencies flawlessly, you will be rewarded. If you model a normal probability of success & risk in those efforts, you get fair value. There is no free lunch here.
The other thing that bears miss is short sellers are not some value creation tool. While some short-term hijinks may very well exist, they do not really impact price. Why not? Price discovery includes long sellers, which dwarf short sellers. Put the bullshit of "synthetic shares" and other non-existent creations out of your mind. Is this a stock you want to buy because you are getting it for less than the price a normal buyer (say Warren Buffet, KKR, etc.) would pay for company in an auction? That's all that matters. To me, the answer to this question, is that if an auction to buy AMC were held today, buyers would pay the approximate market price.
Rough price target: $11 based on 7% discount rate as revenues return to 5B, growing to ~$7B towards the end of the decade. I'm assuming the company returns to prior peak EBITDA. It's possible there is slight upside to this and I will provide updates soon, but I don't see $20 or anything as even possible unless Aron pulls off several tricky execution milestones.
This is Shkreli. You already.