The ongoing year will be remembered as a period where several retail investors made money hand over fist. It started with the short squeeze of heavily shorted stocks like GameStop and AMC Entertainment (NYSE:AMC) in early 2021. These companies, also known as meme stocks, are fundamentally weak and carry significant risks.
Despite these concerns, AMC stock is up a whopping 2,450% year to date.
AMC stock is trading at a premium
Ticket sales in cinema halls have experienced a steady decline since 2002. The rapid rise of streaming platforms will exacerbate the weakness in ticket bookings as Netflix and peers are vying for exclusivity, shrinking the addressable market for theater chains as the shift toward online streaming has accelerated in the past year.
Another issue that will impact AMC stock is its weak financials. The company is burning through cash and its outstanding debt stands at $5.4 billion. According to analysts, the recent rally can be attributed to hype and misinformation which might negatively impact long-term investors.
Noted investor Benjamin Graham once famously said, “In the short run, the market is a voting machine; but in the long run, it is a weighing machine.” It means rumors and popularity impact a stock in the near term but over a period of time, it makes sense to bet on market fundamentals.
In the first quarter of 2021, AMC revenue was down 84% year over year and the stock is currently valued at a price to 2021 sales multiple of 12.6 which is extremely steep for a loss-making company.
Analysts expect sales to rise from $1.24 billion in 2020 to $4.8 billion in 2022 which is still lower compared to revenue of $5.47 billion in 2019. AMC’s management needs theater attendance to reach 85% of pre-COVID-19 levels by Q4 of 2021. In case attendance figures remain tepid, it will have to restructure liabilities and might even file for insolvency.
Quality stocks such as Nuvei are better bets
There are several other companies that are better investments right now. One such stock trading on the TSX is fintech company Nuvei (TSX:NVEI) which provides payment technology solutions to merchants and partners in North America, Europe, Latin America, and the Asia-Pacific. These solutions are designed to support the entire lifecycle of a transaction improving customer engagement in the process.
In the first quarter of 2021, Nuvei sales rose by 80% to $149.9 million, compared to $83.2 million in the prior-year period. Its total GTV or gross transaction volume more than doubled from $8.9 billion to $20.6 billion in this period.
This massive growth meant adjusted EBITDA rose 97% year over year to $65.5 million while adjusted net income rose over 200% to $0.35 per share in Q1 of 2021.
Nuvei attributed the rise in top-line to volume growth from existing merchants as well as the acceleration of new client wins. Its e-commerce business more than tripled in Q1 due to its ongoing investments and expansion of the company’s direct distribution channel.
Analysts tracking Nuvei stock expect sales to rise by 70% to $638 million in 2021 and by 20% to $762 million in 2022. Comparatively, its earnings are forecast to rise from $0.84 to $1.62 in this period.