The honest answer to this question may be easier said than done, as the recent revival of the so-called ‘meme stocks’ also sparked fear of missing out (FOMO for short) in most investors. Only the most disciplined ones can watch GameStop Corp. shares (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC) skyrocket and not feel a thing. Still, that type of emotional discipline takes years to master.

One way to begin this approach is by sticking with a time-tested and logical methodology when picking a stock to invest in, often called a fundamental approach. Today, investors who doubt whether they should follow along in AMC stock’s potential road to riches but still fear the demise of their portfolios if this is, in fact, another failed attempt for the meme stock can get a better view of the land by following a simple checklist.

This checklist includes an overview of the entertainment industry and how movie theaters play a role today. This way, investors can develop a reasonable valuation for AMC stock. More than that, investors will explore how the market and Wall Street feel about these potential prospects for the company moving forward.

AMC Stock and Its Role in the Entertainment Industry: What Investors Should Know

Movie theaters today are like the drive-in theaters of the past, which sometimes offer an uncomfortable experience with setting up your car and ensuring the elements are nice enough to stay and watch the whole movie.

Movie theaters fixed some of the comfort issues. Because their sizes achieved economies of scale, they could offer tickets at cheaper prices. However lovely and nostalgic theaters may be, more and more consumers are choosing the most comfortable (and affordable) route today.

Companies like Netflix Inc. (NASDAQ: NFLX) and Amazon.com Inc. (NASDAQ: AMZN) have taken over the streaming and entertainment industry and, arguably, the consumer discretionary sector.

Access to hundreds of movies at the cost of a single movie theater ticket in most cases and the privacy of watching at home with unlimited bathroom breaks and snacks just make movie theaters an obstacle to pleasure.

Even though AMC owns roughly 23.2% of the movie theater industry’s market share, this space is only expected to grow by 5.1% compounded annual growth rate (CAGR) for the next 5 years, nothing to get excited about.

And That's Why AMC Stock's Valuation Can't Stay High for Much Longer

Today, AMC stock trades at a price-to-sales (P/S) ratio of 2.2x, which is significantly above other entertainment services like Roku Inc. (NASDAQ: ROKU), which trades at 1.8x P/S while having the benefit of online economies of scale discussed earlier.

Even Warner Bros Discovery Inc. (NASDAQ: WBD) trades below AMC at 1.4x P/S. The question is whether AMC can sustain or justify its current high valuation.

The short answer is no; now, here’s the long answer. All five analysts covering AMC stock have rated it as a ‘sell,’ with Citigroup bringing their latest price targets down to $3.2 a share, or 36% below today’s stock price.

In addition, bearish traders have come in to short the stock, as AMC stock’s short interest rose by 2.6% in the past month. To top it off, Antara Capital, one of AMC’s largest shareholders, has been selling heavy share blocks all month.

The company’s financials can be to blame for the current sentiment, as the first quarter 2024 earnings results show that a revenue decline was the least of investor worries. Operating cash flows were negative $188.3 million for the quarter, which, after $50.5 million in capital expenditures, represented a net outflow of $238.8 million for the company.

Because of this inability to generate cash, management has only two options to keep the company running. First, it can issue bonds as borrowed money to keep operations going. Still, nobody is looking to lend this company money for reasons already discussed.

Second, management can issue more shares to fund operations, meaning existing shareholders will suffer from dilution of ownership and a lower stock price. Having no other option, management issued over 130 million shares in the past quarter, taking advantage of the short-lived rally after GameStop.

The only certainty to be expected from AMC is further share dilution unless an overnight invention comes to transform the movie theater industry and position AMC at the top of its new run. Otherwise, it is hard to see whether AMC will become profitable again.