GameStop and AMC fundamental financials ‘remain concerning,’ analyst says

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Despite improved balanced sheets, the fundamental financials of meme-stock darlings GameStop Corp. and AMC Entertainment Holdings Inc. are a cause for concern, according to Benchmark analyst Mike Hickey. 

“Despite meme-driven retail investor interest that also boosted GameStop shares, the fundamental financials of these companies remain concerning,” Hickey wrote in a note released Friday. “GameStop reported an adjusted quarterly net loss of $9 million, while AMC is expected to report a full-year 2023 loss of $386 million.”

“Although stock sales following the meme rallies have improved their balance sheets, analysts question the long-term viability and valuations of both companies,” Hickey added. “GameStop faces an existential threat from the digital transition in the gaming industry, and AMC’s operational woes are closely tied to the lingering impact of the COVID-19 pandemic.”

Related: AMC’s stock rises premarket after Friday’s record-low close

In July, Statista reported that movie theaters in the U.S. and Canada had sold around 825.2 million tickets in 2023, surpassing the 2022 figure of 812.79 million tickets and well above the pandemic-impacted figure of 492.34 million tickets in 2021. “However, despite the growth, the 2023 figure still falls short of the nearly 1.23 billion movie tickets sold in 2019, before the COVID-19 pandemic hit the world,” Statista added in a note.

Benchmark has a hold rating for AMC
AMC,
-1.04%
.
Of eight analysts surveyed by FactSet, four have a hold rating and four have a sell rating for the movie-theater chain.

AMC shares rallied last month after the company swung to a profit and reported its highest quarterly attendance since the fourth quarter of 2019. However, AMC CEO Adam Aron has repeatedly warned that the company faces liquidity challenges.

Related: AMC’s stock gets a Taylor Swift boost as Eras Tour movie tickets go on sale

After a months-long court battle, AMC completed its 1-for-10 reverse stock split in late August. Last week the company filed a prospectus for the sale of up to 40 million shares in an attempt to boost its liquidity. The filing sent AMC’s stock to a record-low close Friday, but the shares rose in early Monday trading. AMC shares are down 0.7% Monday afternoon.

As of June 30, 2023, AMC’s cash position was $435.3 million excluding restricted cash of $22.9 million. The company’s available liquidity was $643.4 million.

The movie-theater chain has been on a roller-coaster ride over the past few years that took it from beleaguered pandemic victim to meme-stock phenomenon. AMC used the steep rise in its share price to tap into equity and debt markets, raising $917 million in January 2021.

Related: AMC reverse stock split, APE conversion remove ‘overhang,’ analyst says in upgrade

Last month, analyst firm Wedbush upgraded AMC to neutral from underperform, citing the reverse stock split, conversion of AMC Preferred units into common stock and “an improving industry backdrop.”

AMC describes itself as the largest movie-exhibition company in the U.S. and the world, with approximately 950 theaters and 10,500 screens across the globe. The company’s stock has fallen 80.2% in 2023, compared with the S&P 500 index’s
SPX
gain of 16.6%.

MarketWatch has reached out to AMC with a request for comment.

Related: GameStop’s demise could come ‘later this decade,’ Wedbush warns

GameStop reported better-than-expected second-quarter results last week, boosted by international sales and what the company described as “a significant software release.” The videogame retailer is also ramping up its efforts to control costs. GameStop’s selling, general and administrative expenses were $322.5 million, or 27.7% of net sales, compared with $387.5 million, or 34.1% of net sales, in the same period last year.

However, GameStop still faces plenty of challenges, according to Wedbush analyst Michael Pachter. “While we laud interim management’s plans to control costs further, it is difficult (if not impossible) for a company to ‘save its way’ to prosperity, particularly in the face of an existential threat such as the one faced by GameStop,” he wrote in a note last week. “Digital downloads continue to grow, and unlike online sales of pet food (involving a physical product that requires logistical expertise to warehouse and deliver), video games can be downloaded to any of the game consoles that GameStop’s customers use to play their games.”

Other challenges faced by GameStop include far fewer big console-game releases going forward, with a noticeable shift to PC games, according to Pachter. The analyst also highlighted the growth of gaming subscription services and GameStop’s “lack of a clear strategy to enter new categories that have the potential to drive growth.”

Related: GameStop’s stock jumps after results top estimates, helped by international gains

“The demise of GameStop is outside the 12-month window we use for our price target, but we expect the company’s demise at some point later this decade,” Pachter added.

Wedbush maintained its underperform rating for GameStop and lowered its price target to $6 from $6.20. Of two analysts surveyed by FactSet, one has a hold rating and one has a sell rating for GameStop.

The company’s stock has fallen 7.5% in 2023. MarketWatch has reached out to GameStop with a request for comment.

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