Don't Buy AMC Entertainment Until This Happens

AMC Entertainment (NYSE: AMC) may be down by more than 99% from its meme-stock-era highs, but that hasn't stopped investors from speculating in the movie theater operator's shares lately. Following a spate of positive news about ticket sales, shares zoomed earlier this month from under $1 to around $1.75.

Yet while the stock has so far held on to most of these gains, I am of the view that AMC remains one of the most overvalued stocks on the market, and not worth buying.

Why? It all has to do with the company's high debt position and how this factor will limit the stock's long-term ability to bounce back, even if U.S. box office revenue returns to its pre-COVID levels.

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AMC's valuation problem

Over the past month, strong ticket sales for films like Project Hail Mary and The Super Mario Galaxy Movie have boosted movie theater stocks, especially AMC Entertainment. While the stock's meme days may be in the distant past, it continues to make highly volatile moves.

With the stock now holding relatively steady, you may think those recent gains are sustainable. Not only that, you may think that the stock could gain further if a strong domestic box office translates into improved results for AMC in 2026.

However, AMC's results could improve dramatically, with earnings before interest, taxes, depreciation, and amortization (EBITDA) returning to pre-pandemic levels, and the stock would still be overvalued. How so? For one thing, with AMC's $4 billion in outstanding debt and $3.5 billion in lease liabilities, the company's enterprise value (i.e., its market cap plus debt and lease liabilities) is around $8 billion.

Based on the company's trailing-12-month EBITDA of around $341.9 million, the stock currently trades at an enterprise value/EBITDA ratio of around 23, more than twice the valuation of rival movie theater-focused entertainment stocks such as Cinemark Holdings (NYSE: CNK) and The Marcus Corporation (NYSE: MCS). Given this valuation gap, further improvements in box-office results would only enable AMC to "grow into its valuation" --- they wouldn't justify the stock rising in line with the company's improved results.

Wait for a better valuation

It's not a mystery as to why AMC continues to have such a wide valuation discrepancy. The meme stock phenomenon may be over, but this stock, much like GameStop, continues to trade at levels that are out of line with the business's fundamentals.

However, as time passes and this investing fad fades further, AMC's remaining undeserved premium is likely to evaporate.

Admittedly, a scenario could emerge where the theater operator becomes investable again. For example, if AMC's share price were to fall while its fiscal performance continued to improve, the stock could, in theory, sink to a valuation lower than that of its publicly traded competitors. However, unless and until this happens, err on the side of caution: Consider AMC one of the top penny stocks to avoid.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.