AMC Entertainment made a gutsy move Tuesday. The movie theater chain has pivoted back to an offensive strategy on a bet that its retail investors will stick with the company long enough for it to recoup its pandemic losses.
For months, new fans of the stock, who call themselves "apes," have been threatening analysts who have suggested that AMC's stock is overvalued. The apes have remained bullish on traditionally heavily shorted stocks and have used their growing numbers to make waves on Wall Street. Some have verbally assaulted the analysts, who have been warning that the debt-burdened company could ultimately go bankrupt, rendering the stock worthless.
Last week, AMC shares spiked more than 116% from Monday to Friday, closing at $26.12. The stock has surged more than 1,100% since January.
But rather than seeing the strong Memorial Day weekend box-office performance as a signal that it could get its finances back on track or focus on paying down its massive debt, the company said it would double down on future investments. In doing so, AMC's management is making a risky bet that these retail investors will continue to prop up the company.
Shares of the stock surged Tuesday after the theater chain sold more than 8 million shares to Mudrick Capital Management. AMC said in a securities filing that it raised $230.5 million through the stock sale and would use those funds for potential acquisitions, upgrading its theaters and deleveraging its balance sheet. Mudrick also invested in AMC in December.
On Tuesday, Bloomberg reported that the firm had sold off all its shares.
Representatives for Mudrick did not immediately respond to CNBC's request for comment.
"Given our scale, experience and commitment to innovation and excellence, AMC is being presented with highly attractive theatre acquisition opportunities. We are in discussions, for example, with multiple landlords of superb theatres formerly operated by Arclight Cinemas and Pacific Theatres," said CEO Adam Aron in the filing.
In pre-Covid times, AMC focused heavily on growing its footprint and upgrading its theaters in order to generate revenue. But many would have expected the pandemic to have changed its position. The health crisis shuttered theaters for months. With no money coming in from ticket sales and concessions, AMC fell behind on its rent. It had to scurry to raise money just to get by. AMC had been on the brink, which drew in short sellers, who doubted the company would weather the storm.
But it did, partially because of the apes, who swooped in and drove up the stock price. That allowed Aron to capitalize on the interest in the stock to raise funds. Tuesday's announcement shows he's not flinching from being opportunistic again.
Other companies in AMC's situation would make debt repayment its top priority for the next year. But instead Aron's turning back to M&A, which is how the company became the nation's largest theater chain. Aron added Carmike, Odeon and Nordic shortly after taking the role of CEO in 2015.
"The retail investors seem to have an agenda, which is to keep AMC alive, while sticking it to the hedge funds, and hopefully make a lot of money in the process," said one Wall Street analyst, who asked not to be named. "They want to democratize the stock market, and remove power from the wealthy."
And so far, the strategy is working. Short sellers are estimated to have lost $1.23 billion in AMC last week.
The biggest question is: How long can it last? AMC's bet is that the retail investors will stay interested in the stock long enough for its business to stabilize.
Wall Street analysts have described these new investors as uneducated and emotional. Since the January stock surge, some have used social media to attack anyone who shares negative opinions of AMC. In particular, analysts who have "sell" ratings or suggested AMC's stock is overvalued have been fending off Twitter attacks and angry phone calls to their offices. These remarks have gone beyond mere criticism. In some cases, police have been notified about threats. CNBC has reviewed hundreds of messages sent to analysts that contain harassing language and graphic images.
Representatives for AMC did not immediately respond to CNBC's request for comment.
Rise of the AMC 'apes'
Rich Greenfield, partner at LightShed, a technology, media and telecommunications research firm, has borne the brunt of the ire both publicly on Twitter and Reddit forums and through private messages, phone calls and emails.
"I hope you go bankrupt you self-serving little b----," one AMC investor messaged Greenfield.
"I'm increasing my position by $10k tomorrow just because I don't like Rich Greenfield's face," another wrote on Reddit last Tuesday.
In another message shared with CNBC, an AMC investor sent Greenfield a photo of a gorilla having sex with another gorilla that had Greenfield's face photoshopped on it.
To be sure, not all AMC retail investors are participating in this campaign. Many have discouraged this behavior, calling on those who are harassing analysts to stop. However, the continued deluge of messages has led Greenfield to involve the police and to make his account private.
"It's one thing to disagree and say 'you are wrong,'" Greenfield said. "It's another thing to attack everything about you."
These messages are a response to Greenfield's March downgrade of AMC in which he gave a 12-month price target of just 1 cent.
"It will never generate cash again," Greenfield said on CNBC's "Squawk Box" on Friday. "That's why we have a one-penny price target is that this company is headed for bankruptcy. The only choice it has is to issue hundreds of millions of shares."
On Tuesday, AMC warned investors that the issuance of more shares is a strong possibility in the future. Each time AMC issues more stock, the value of current shares is diluted.
CNBC reached out to a number of analysts who cover AMC and many refused to comment out of fear of repercussions from these retail investors. Some indicated that they had already received phone calls, emails and other messages in response to previous downgrades of the stock.
"I would prefer to not comment for this article," one wrote in an email to CNBC. "Sorry. I have no desire to engage in a war of words or mathematical analysis with the 'apes' ... And it's not like anyone is going to change their minds. No flexibility in their line of thought."
The apes have been emboldened by Aron's support. During an earnings call in May, Aron said, "They own AMC. We work for them. I work for them."
Aron has tailored his actions to this shareholder base. Aron and AMC both plan to donate $50,000 to the Dian Fossey Gorilla Fund — a clear nod to these new investors.
The company also delayed its annual shareholders meeting by more than a month in order to give these investors an opportunity to attend the event and "make their important voices heard."
AMC also has shifted its communication style to speak directly with shareholders via social media, including YouTube. Aron has taken a renewed interest in Twitter, "following" hundreds of accounts tied to the "ape army."
AMC vs. the cinema industry
In his March note, Greenfield reiterated his confidence in the movie theater industry but his skepticism about the future of AMC.
"The future of movie-going is not in doubt," he wrote. "The future of AMC Theaters, however, is very much in doubt, with its current stock price dramatically overvalued, in our view. There is a substantial disconnect between the future of aggregate movie theater attendance and in turn AMC's earnings power relative to its current enterprise value and over-levered capital structure."
His price target isn't far off from the average, although it is the lowest of the bunch. On average, AMC has a target price of $5.11, according to FactSet. That would represent a more than 80% decline from the stock's current level.
Eric Wold, senior analyst at B. Riley Securities, said landlords have proven to be very amenable when it comes to rent, allowing repayments to be deferred over the course of 10 years.
Wold has had an increasingly positive view on AMC based on its balance sheet position, its new terms with landlords and improved cash flow. This is what led Wold to issue a price target of $16 in mid-May.
Wold's price target of $16 was surpassed last Tuesday, leading him to downgrade the stock from "buy" to "neutral." At that time, Wold had been the sole analyst with a buy rating, according to FactSet.
"Given that we only recently increased our [price target] from $13 to $16 on [May 14], we are moving to the sidelines with an inability to justify taking that [price target] any higher at this point," he wrote in a research note to investors Wednesday.
Even as the domestic box office gains momentum, it could take time for AMC to reap those revenue benefits. The company is saddled with around $5 billion in debt and needed to defer $450 million in lease repayments during the pandemic. Much of its debt came from previous acquisitions and investments in upgrading its theaters' seating, all of which was done prior to Covid-related shutdowns.
Though the company ended the first quarter with $1 billion in liquidity, the most it's ever had in its 100-year history, that cash will only keep it afloat through 2022 unless audiences return in droves to make up for months of no revenue.
Analysts such as Greenfield are skeptical that AMC can return to its pre-pandemic earnings in 2022.
In the first quarter of 2021, AMC posted a loss of $294.7 million before interest, taxes, depreciation and amortization and reported only $148.3 million in revenue, down 84.2% from the same period a year ago.
While the company will see revenue gains as more moviegoers return to cinemas, it may not reach 2019 levels in the near term or the long term.
Because of this, analysts are growing concerned that the company's valuation continues to rise. On the last day of 2019, AMC had an enterprise value of $5.8 billion. On Tuesday, that value stood at around $16.7 billion.
The company's enterprise-value-to-EBITDA ratio has risen from a multiple of 7.6 times at the end of 2019 to a multiple of 25 times, Greenfield said Friday.
"This is now one of the most expensive stocks in the entire media universe," he said.
For comparison, Discovery, which recently bought WarnerMedia from AT&T, trades at a multiple of 9.1 times its EBITDA, ViacomCBS trades at 8.5 times, and Comcast trades at 9.4 times.
AMC noted in its securities filing Tuesday that one risk factor for investors is that the stock could be considered overvalued.
"Our market capitalization, as implied by various trading prices, currently reflects valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization immediately prior to the COVID-19 pandemic," AMC executives said in Tuesday's SEC filing.
"And to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our Class A common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations," the filing said.
This is all before the company makes any other big bets, such as an acquisition — which can be a risky bet even in the best of circumstances.
AMC is currently looking at Decurion's Pacific Theatre and ArcLight Cinema chains. Decurion said in April that the two chains' combined 300 screens would not reopen after being shuttered during the pandemic.
At that time, the company did not detail the reasons behind its decision to remain closed but did say that it had "exhausted all potential options" and that it doesn't have a "viable way forward."
It's unclear if AMC will seek to purchase all of Decurion's theater locations or only specific venues, such as the iconic Cinerama Dome in Los Angeles.
When Decurion first announced that these locations were closing, many observers speculated that another movie chain would swoop in to buy out the properties but didn't expect AMC to be a top contender.
Still, AMC has defied skeptics before. It has stayed out of bankruptcy court by raising money and was able to repay some of its debt thanks to stock boosts from new investors.
Of course, this investor frenzy is uncharted territory for the company. Even the success of other companies, such as GameStop, that have been bolstered by these kinds of retail investors aren't a true comparison.
GameStop has been able to overhaul its management team and raise money to invest in modernizing its business, potentially giving it new life. It has also been able to eliminate its long-term debt, something that AMC will continue to struggle with going forward.
It's why most Wall Street pros say AMC's apes are taking such a big risk.
AMC's new retail investors, who number 3.2 million, own about 80% of the company's 450 million outstanding shares as of March 11, AMC reported earlier this month. It's likely that the very investors who helped revitalize AMC will be the ones left holding the bag, several analysts agreed.
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
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