AMC: Buy-to-Covers Are Driving the Stock Up


AMC shares have seen an impressive rally after the company reported Q3 earnings. Here's what's behind the share price increase.

  • On November 8, AMC reported an all-around beat on Q3 earnings, and AMC shares rallied more than 50% in the following days.
  • AMC is expecting an even better fourth quarter, with the release of blockbusters Black Panther: Wakanda Forever and Avatar 2.
  • The latest AMC stock surge also stems from short sellers being forced to hedge their positions at very high borrow fees.
Figure 1: AMC: Buy-to-Covers Are Driving the Stock Up

Getty Images

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A Better-Than-Expected Quarter

For the third quarter (Q3), AMC Entertainment ( AMC ) - Get Free Report reported earnings per share (EPS) and revenue that beat Wall Street's estimates.

Revenue came in at $968 million, versus expectations of $961 million. And the company reported hosting more than 53 million moviegoers in the third quarter, which is a year-over-year increase of 33%.

However, the movie theater chain also reported wider net losses than in the same period last year. AMC had a loss per share of 20 cents, versus an expected loss of 24 cents.

AMC also reported that it has about $900 million of liquidity, which provides it with some strength to move toward its goals of both growth and financing its operations. It will also help keep AMC out of bankruptcy for the near term.

Although the quarter wasn't the best AMC has ever had — and it still failed to meet pre-pandemic levels — the company could have done worse, considering industry headwinds.

Recently, rival theater chain Cineworld filed for Chapter 11 bankruptcy protection. That made investors pessimistic about the industry as a whole, putting pressure on AMC's stock.

Because AMC was able to weather a difficult quarter suffering taking additional damage, its shares enjoyed a rally of more than 50% in the days following the earnings announcement.

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Domestic Box-Office Bullishness Is Back

Another factor driving the strong reaction in AMC shares was the opening of Black Panther: Wakanda Forever . AMC enjoyed the fourth-largest weekend audience of 2022, with about 5 million moviegoers buying tickets at the company's movie theaters.

Also, early projections for Avatar: The Way of Water , which is expected to gross $650 million domestically, are impressive and hopeful for the fourth quarter.

Still, AMC CEO Adam Aron is being realistic. He has reiterated that, in the full fiscal year 2022, AMC will still see attendance a third below pre-pandemic levels. However, he expects that the moviegoers will return in full force by 2024 or 2025.

Lots of Buy-to-Covers

It's no news that AMC was able to survive the COVID-19 pandemic thanks to retail investors who came together to "squeeze" the short sellers who were betting on the company's downfall.

This "meme stock" mania caused a big spike in AMC's share price — enough so that the company was able to raise over $1 billion in cash by issuing more shares, which helped keep the company's liquidity in shape.

According to AMC's CEO, "If [retail investors] hadn't been there, we wouldn't be here today."

The truth is, even more than 18 months after meme investors "adopted" AMC, shares remain highly vulnerable to short squeezes. This is because there continues to be a lot of short sellers betting against the stock.

According to the most recent data, AMC's short interest stands at over half-a-billion dollars, and nearly 20% of its total float is being shorted.

AMC's popularity among short sellers is even more noticeable when you look at the borrow fees that are required to short the stock.
Figure 2: AMC's borrowed shares.

Stocksera data by Interactive Brokers

Driven by short interest supply and demand, during October, fees remained between 18%. After the third-quarter earnings release, AMC's borrow fee rates jumped to over 100%. At these levels, volatility in the stock is certainly due to buy-to-covers.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)

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