NYU's 'dean of valuation': AMC won't be able to justify lofty stock price using old business model

Published Thu, Jun 3 20213:21 PM EDT

AMC Entertainment must adapt to the shifting entertainment landscape if the company wants to survive and maintain its current market valuation, New York University's Aswath Damodaran told CNBC on Thursday. The theater chain's traditional strategy won't cut it in the emerging movie business, the finance professor said, but top brass is making strides to meet the moment. "I think that at the moment there's clearly no way you can get to a $33 billion market cap with the old business model that AMC had," he said on " Tech Check ." "But from my perspective at least they're doing the right thing in raising capital and getting themselves ready for the transition that's ahead." Damodaran, known as Wall Street's "dean of valuation," credited AMC for doing what GameStop , another favorite among the internet trading community, did not: taking advantage of its stock's sudden momentum. AMC shares this week soared above $60, continuing an uptrend from about $9 per share in less than a month. "Clearly, the business is ripe for change, and AMC owns a niche of this business that's less critical than it used to be but still a critical cog in the wheel," Damodaran explained. "I think even before Covid AMC was on its pathway to a subscription model ... I think you're going to see more movement in that direction." The stock experienced wild trading Thursday. It fell 30% early in the day, then rallied before turning negative again prior to 3 p.m. ET. AMC announced Thursday that it executed a new stock offering, raising $587.4 million in additional capital on 11.55 million shares. The company has raised $1.246 billion in the second quarter alone, which it intends to use in part to "capitalize on attractive opportunities in the future," AMC CEO Adam Aron said in a statement. The high-volume trading in and capital moves by AMC come in the midst of blockbuster consolidations in the movie industry as online video streaming takes center stage. Last month Amazon placed a $9 billion bid for MGM Studios and AT & T took action to offload its WarnerMedia asset. "I think this has made AMC clearly the strongest player in the theater business, because if you look at the competition they don't have the access to capital that AMC has right now," Damodaran said. "I think this is the first step in a process." The stock surge is powered in large part by retail traders participating in the so-called meme stock frenzy. It mirrors the activity that carried shares of GameStop, the beleaguered brick-and-mortar video game store, to eye-popping levels earlier this year. The move was executed by traders, inspired largely by Reddit discussions, who did away with most traditional investment fundamentals. Many sought to bust short sellers in the stock, among others, and speculate on the company's digital future. "I think that at the moment there is a feedback loop from the price going up, and AMC I think is playing this game a lot better than GameStop is," Damodaran said. "I think they're taking advantage of what might be an opportunistic moment to raise capital."

Street performers in Minnie Mouse costumes pass in front of an AMC movie theater at night in the Times Square neighborhood of New York, Oct. 15, 2020.

Amir Hamja | Bloomberg | Getty Images

The theater chain's traditional strategy won't cut it in the emerging movie business, the finance professor said, but top brass is making strides to meet the moment.

"I think that at the moment there's clearly no way you can get to a $33 billion market cap with the old business model that AMC had," he said on "Tech Check." "But from my perspective at least they're doing the right thing in raising capital and getting themselves ready for the transition that's ahead."