Shareholders of AMC Entertainment would probably like to forget the past six months even happened. The stock dropped 34.6% and now trades at $2.66. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in AMC Entertainment, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than AMC and a stock we'd rather own.

Why Do We Think AMC Entertainment Will Underperform?

With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, AMC Entertainment’s demand was weak and its revenue declined by 3.3% per year. This wasn’t a great result and is a sign of poor business quality.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While AMC Entertainment posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, AMC Entertainment’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.8%, meaning it lit $7.80 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

AMC Entertainment burned through $296.3 million of cash over the last year, and its $8.28 billion of debt exceeds the $632.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the AMC Entertainment’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of AMC Entertainment until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping consumers, but in the case of AMC Entertainment, we’re out. After the recent drawdown, the stock trades at 1.9× forward EV-to-EBITDA (or $2.66 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

Stocks We Like More Than AMC Entertainment

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