What happened
Shares of AMC Entertainment (NYSE: AMC) declined by 9.8% on Monday, as the popular meme stock surrendered some of its recent gains.
So what
AMC's stock price rose roughly 25% last week, after the company said 99% of its U.S. locations would reopen by March 26. However, while this is certainly good news for movie fans and AMC, investors may have bid up the theater chain's stock price too far, too fast.
AMC Entertainment's shares fell sharply on Monday. Image source: Getty Images.
As part of its reopening plan, AMC will implement social distancing measures and increased cleaning and safety protocols. This includes seat blocking, upgraded air filtration systems, and mandatory mask-wearing. While necessary to prevent the spread of the coronavirus, these capacity restraints and added costs will weigh on AMC's revenue and profits.
Moreover, AMC was forced to sell large amounts of stock and debt in order to raise the cash it needed to survive the COVID-19 crisis. In turn, AMC's larger share count and burdensome interest payments will make it more difficult for it to produce enough per-share profits to justify its now higher share price.
Now what
Many traders have piled into AMC's shares in hopes of earning quick profits, and some have been successful in doing so. But investors should remember that while popularity can impact a stock's price in the short-term, it is a company's profits and cash flows that ultimately determine the long-term performance of its shares. And in this regard, AMC's future is likely bleaker than many of its shareholders would like to believe.
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