Why AMC Stock Dropped Tuesday

The struggling movie theater chain's shareholders could suffer brutal losses.

What happened

Shares of AMC Entertainment (NYSE:AMC) fell 7% on Tuesday after Citi analyst Jason Bazinet issued a dire warning to the company's investors.

So what

Bazinet reiterated his sell rating on the theater operator's shares on Tuesday. He sees AMC's stock plunging to $2 per share. Bazinet's price forecast thus represents potential losses for shareholders of roughly 85% from the stock's current price near $13.

Bazinet acknowledged that AMC's efforts to raise cash via stock and debt sales have made it likely that it will survive the coronavirus pandemic. He also noted that recent theater reopenings in New York and California will be beneficial to AMC's recovery hopes. However, Bazinet argued that AMC's stock is "overvalued at prevailing levels."

Now what

To Bazinet's point, it's difficult to make the case that AMC's stock price is justified by thefundamental valueof its business. Although it was necessary for AMC to raise cash, its stock and debt offerings have diluted shareholders and increased its interest payment requirements. This will make it challenging for AMC to deliver adequate per-share profits to support its current stock price. So, while Bazinet's $2 price target might seem low, it's likely directionally correct.