Should AMC Make a Billion Dollar Bet on Bitcoin in 2022?

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A few companies have started adding Bitcoin (CRYPTO: BTC) to their balance sheets as a replacement for ultra-safe cash and bonds. Others took advantage of the surge in stock prices by issuing new share certificates. Lately, a handful of brave companies have even combined the two strategies, raising cash through stock offerings and investing some or all in Bitcoin tokens.

Movie theater operator AMC Entertainment Holdings (NYSE: AMC) has raised $ 2.06 billion in cash over the past four quarters, averting the threat of bankruptcy amid an era of coronavirus restrictions and deep cash flow negative. Should AMC convert some of its much-needed cash reserves into digital coins?

Some would call it a reckless move, and they are not wrong. However, the idea is not completely crazy – as long as AMC delves into the cryptocurrency market with some caution.

Image source: Getty Images.

A risky idea

Buying Bitcoin tokens with the aim of keeping them on your business’s balance sheet is not a common practice. The flag bearer here is business analysis firm MicroStrategy (NASDAQ: MSTR), which has invested $ 3.7 billion in a Bitcoin collection valued at $ 5.8 billion. This company reinvested most of its long-term investment papers in Bitcoin tokens in the second half of 2020, raised $ 2.4 billion in new debt and an additional $ 400 million in a stock offering in the alone. aim to buy even more tokens. MicroStrategy is also sweeping its free cash flow straight – you guessed it – by buying more Bitcoin.

MicroStrategy’s Bitcoin collection is worth $ 5.75 billion at current conversion prices. The company’s market capitalization is $ 5.66 billion, or 1.6% lower.

This strategy could bear fruit if Bitcoin prices generate significant long-term growth. MicroStrategy could make billions of dollars from its digital investments under the right circumstances, where Bitcoin prices double or triple in 2022. Sound effects like “ka-ching” and “bingo” would be appropriate in this case, and MicroStrategy could leverage its rapidly expanding Bitcoin. investments to develop and improve its core business.

It could backfire on him in different circumstances as well. For example, Bitcoin prices could stall and collapse again, as they did after another unleashed growth spurt in 2017. Or, another digital currency could push Bitcoin from the throne and become the obvious choice for them. digital currency investments. Both of these possibilities would cause Bitcoin’s high-flying price to explode to the ground. It could take years to regain what was lost, and there is no guarantee that Bitcoin will ever recover.

MicroStrategy could survive a Bitcoin meltdown, at least for a few years. The company makes money on its business analysis operations, reporting earnings before interest and taxes of $ 64 million in the past four quarters. A cryptocurrency crash would be painful and the dream of digital wealth might vanish in the blink of an eye, but the business would have to survive.

AMC should not bet on Bitcoin

The cinema chain comes into the picture from a very different angle.

AMC’s operating profits were barely positive in 2019, reaching $ 169 million on revenue of $ 5.5 billion. This comes down to an operating margin of just 3.1%. MicroStrategy is currently posting a reading of 12.6% on the same metric, while AMC’s operating results have been rocked by the pandemic. AMC has recorded an operating loss of $ 1.7 billion in the past four quarters.

Left on its own, MicroStrategy can fend for itself while generating respectable revenue and profit from its regular business operations. AMC could exhaust its cash reserves in about a year if the film business remains unprofitable. To keep the lights on, the business might need unfortunate tactics such as increasing debt, selling more shares, or asking creditors for a break on interest payments.

Do not believe me ? Just watch:

AMC data on total long-term debt (quarterly) by YCharts

The company has indeed used these ideas to get through the pandemic. AMC has increased its long-term debt balance by 15% as the diluted stock count has increased fivefold in this year’s rush to take advantage of unreasonably high stock prices.

Converting all of AMC’s long-term capital into Bitcoin would indeed be a risky idea. The company would bet the proverbial firm on the future of Bitcoin pricing, accepting that a weak year or two could trigger bankruptcy proceedings.

A safer approach

MicroStrategy’s all-in bet on Bitcoin is an extreme example, of course. Other companies have added much smaller portions of Bitcoin to their long-term holdings.

Electric vehicle maker Tesla (NASDAQ: TSLA) invested $ 1.5 billion in 43,200 Bitcoins, and digital payments specialist Block (NYSE: SQ) bought 8,000 tokens for $ 220 million. These investments are substantial, but they also represent a tiny fraction of each company’s investments and cash equivalents.

Tesla had $ 16 billion in cash at the end of the September 2021 quarter. Digital tokens represent only 11% of Tesla’s cash and investments. Block’s liquid assets totaled $ 6.9 billion at the same time, along with an additional $ 1.5 billion in long-term debt. $ 392 million in Bitcoin in current value is only 4.4% of this company’s total cash and investment.

It would be a safer idea for AMC. Holding a small slice of your money in this risky but promising form could pay big dividends in a future of rising cryptocurrency prices – without adding much risk in the event of a negative outcome.

What if AMC funnels something like $ 200 million of its $ 1.7 billion investable cash reserves into Bitcoin tokens?

That’s an 11% slice, comparable to Tesla’s lukewarm bet on Bitcoin. Growth investors like ARK Invest’s Cathie Wood expect Bitcoin prices to increase tenfold or more over the next five years. Under these favorable circumstances, AMC would bring in an additional $ 2 billion in cash over five years – a revolutionary result that could help the company stay afloat for years to come. And if things go wrong, well, AMC has spent over $ 200 million in cash in seven of the past eight quarters. Another setback that burns money on this scale is essentially a rounding error.

AMC should buy Bitcoin (but it’s still a deeply troubled stock)

So AMC could make a small investment in Bitcoin tokens to prepare for potentially life-saving gains without adding much risk to the picture. At the same time, retail shareholders would flock to this forward-looking move, perhaps allowing the company to raise more cash through another (less popular) stock offering.

Let’s be clear: AMC is overvalued at pretty much any cost these days. A bold investment in Bitcoin would only save the day if the company also revamped its large-scale business model. Perhaps the only viable way forward is to ditch the movie theaters altogether, turning the business into a digital asset manager instead. I am not a buyer of AMC shares today whether or not the company adopts cryptocurrency investments.

But a modest digital investment would at least give AMC a chance to become a better version of itself. I think it’s worth it.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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