This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The trailblazer of streaming entertainment, Netflix (NASDAQ: NFLX), has experienced tremendous growth in the past decade, growing from a $14 billion market cap to the $223 billion giant it is today. Revenue over the past four quarters totaled $26.4 billion, and the company now has 208 million paying members in more than 190 countries who enjoy what the service has to offer. 

This kind of success, however, attracts competition. And with a slowdown in growth during Q1 of this year, investors are wondering, “How will Netflix continue to add subscribers?” Read on to find the answer. 

1. Keep producing great content 

For the monthly cost of $13.99 (U.S. standard plan), viewers gain access to a content library worth $26 billion. This catalog was good enough to give Netflix 35 Oscar nominations this year, more than rivals Amazon and Walt Disney combined. Above all else, focusing on delivering a fantastic product for consumers should remain a top priority. 

Netflix’s value proposition is enormous, and that’s why management will occasionally raise prices, with the most recent hike happening late last year. Even with this, engagement increased and member churn decreased in the most recent quarter compared to Q1 2020. This explains why despite subscriber growth rising only 13.6% year over year, revenue soared 24.2%. 

The business plans to spend $17 billion on content in 2021, which will certainly help maintain its success at generating hit shows and movies. Netflix’s first-mover advantage is vital, as it’s now able to spread these costs over such a large subscriber base. The fact that rivals in this industry are turning to mergers and acquisitions to gain any advantage demonstrates just how dominant Netflix’s position is. 

2. Push international growth 

In the first quarter, Netflix added only 450,000 new customers in the U.S. and Canada (compared to 2.3 million additions in the region in the year-ago period), so shareholders are expecting overseas markets to drive growth. Markets outside the U.S. and Canada now account for 64% of the company’s subscriber base, a number that should rise going forward. 

India, the fastest-growing market for video streaming platforms in the world, is a massive opportunity. According to Media Partners Asia, a consulting firm, Netflix has roughly 5 million subscribers in the country today, which is just 2.4% of the company’s total. 

With a slate of 40 local productions to be released this year, Netflix is going all in on the South Asian nation. During a visit to the country in 2018, co-founder and co-CEO Reed Hastings said that the company’s next 100 million subscribers will be coming from India. Rapid growth of monthly active internet users, of which there are currently 574 million, coupled with a mobile-only plan launched in July of 2019, will support these ambitions. 

Speaking more broadly, Netflix still has a long runway for expansion internationally. There are currently just over 1.1 billion pay-TV households worldwide. If the business can reach even half that number, that’s huge. 

3. Take advantage of optionality 

The final answer to how Netflix will continue to grow its subscriber base is still a very new concept. The company is reportedly looking to hire a video gaming executive to its ranks. It’s clearly all speculation at this point, but Netflix may offer a small bundle of games, as with Apple Arcade, and it may launch this service in 2022. 

It’s unknown whether Netflix will license from others or develop its own games in-house, but the push into video games is a positive development for investors. It demonstrates the optionality that’s inherent in Netflix’s business model. 

The company has valuable intellectual property with its shows and movies that it can translate to a gaming environment. It’s already done the opposite, with many of its titles (such as Resident Evil and The Witcher) based on popular video games. This has the potential to be a lucrative second act for Netflix in its quest to control more of consumers’ attention. 

This answers the question 

Don’t worry, shareholders. Netflix is a disruptor, an innovator, and a pioneer, and its growth story is far from over. Producing compelling content, expanding overseas, and pursuing new revenue opportunities will propel the company over the next decade. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 1 question Netflix has to answer appeared first on The Motley Fool Australia.

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Neil Patel owns shares of Amazon, Apple, and Walt Disney. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Amazon, Apple, Netflix, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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At the start of each week I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Kogan.com Ltd (ASX: KGN) remains the most shorted share on the Australian share market by some distance after its short interest rose to 12.2%. Short sellers have been going after this ecommerce company after it reported significant inventory issues which have been weighing heavily on its recent performance.
• Resolute Mining Limited (ASX: RSG) has seen its short interest remain flat at 10.3%. This gold miner’s shares have come under pressure this year due to regulatory issues at its Bibiani operation in Ghana and its underwhelming production performance and guidance.
• Webjet Limited (ASX: WEB) has seen its short interest hold firm at 10.2%. Short sellers appear to believe the online travel agent’s shares are overvalued at the current level. Particularly given the stuttering travel market recovery due to COVID breakouts.
• Temple & Webster Group Ltd (ASX: TPW) has seen its short interest rise to 9.6%. This online furniture and homewares retailer disappointed the market recently by announcing that it would sacrifice profit growth in order to invest heavily in its future sales growth.
• Electro Optic Systems Hldg Ltd (ASX: EOS) has 9.1% of its shares held short, which is up sharply week on week. This may be due to supply chain issues which could prevent the communications, defence, and space company from delivering on its sizeable sales pipeline.
• Tassal Group Limited (ASX: TGR) has short interest of 9.1%, which is down week on week. Weak salmon prices could be partly to blame for the high level of short interest.
• Flight Centre Travel Group Ltd (ASX: FLT) has seen its short interest ease notably to 8.5%. Short sellers may have been closing positions after a reasonably sharp pullback in the Flight Centre share price over the last two and a half months.
• Megaport Ltd (ASX: MP1) has short interest of 8.1%, which is down slightly week on week. Some short sellers appear to believe the Network as a Service provider’s shares are overvalued at the current level.
• Inghams Group Ltd (ASX: ING) has 7.9% of its shares held short, which is down slightly week on week. Short sellers may be regretting this one. The Inghams share price has been charging higher recently after providing earnings guidance well ahead of the market’s expectations.
• Zip Co Ltd (ASX: Z1P) has short interest of 7.3%, which is down week on week. This buy now pay later provider’s shares have more the halved in value since the middle of February. Valuation concerns appear to be weighing on its shares.

The post These are the 10 most shorted shares on the ASX appeared first on The Motley Fool Australia.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd, Temple & Webster Group Ltd, and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Electro Optic Systems Holdings Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited, Kogan.com ltd, MEGAPORT FPO, and Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The SILK Laser Australia Ltd (ASX: SLA) share price is on the move on Monday morning.

In early trade, the laser, skin care, and cosmetic injections company’s shares are up 3% to $3.92.

This means the SILK share price is now up 13.5% from its December IPO price of $3.45.

Why is the SILK share price rising today?

Investors have been buying the company’s shares this morning after it announced the achievement of a key milestone.

According to the release, SILK has now reached a total of 60 clinics nationwide after opening two new clinics in Woden, ACT and Charlestown, NSW.

The release advises that the new clinic openings are in line with SILK’s organic network growth strategy of rolling out additional clinics in markets where it is currently under-penetrated, including Canberra and Newcastle.

SILK has now opened ten new clinics in FY 2021, with two more clinics expected to open by the end of the month. This will exceed SILK’s organic growth goal of opening six to ten new clinics per annum as the company progresses to its medium-term network plan of approximately 150 clinics.

The new Woden and Charlestown clinics operate under the joint venture ownership model, with leading cosmetic injectable nurses as SILK’s joint venture partners in these clinics.

Both joint venture partners have a strong existing client base in their respective markets. As a result, the new clinics are expected to ramp up sales quickly and generate positive cash flow and EBITDA in their first year of operation.

Management commentary

SILK’s Managing Director and Co-Founder, Martin Perelman, commented: “We are very excited to launch our newest injector-led clinics in Woden and Charlestown. The joint venture ownership model offers the injector nurses an attractive entry into business ownership while allowing us to attract key talent to SILK and deliver strong clinic performance from day-one.”

“Our first clinic in Canberra opened in March this year and, pleasingly, it has performed in line with expectations. We see great potential in the ACT market, and we’re excited to expand our presence there to two locations following the opening of our Woden clinic.”

“The Charlestown clinic in Newcastle is off to a flying start, recording SILK’s highest opening day of sales on record. We are fortunate to have two experienced nurse injectors with strong existing client bases onboard to lead our newest clinics, and I am confident that they will be successful in their respective markets,” he concluded.

Trading update

SILK also revealed that it remains on track to achieve its upgraded guidance in FY 2021.

Network cash sales is expected in the range of $82 million to $86 million, with pro forma EBITDA forecast to be in the range of $15 million to $16 million.

The post Why the SILK Laser (ASX:SLA) share price is pushing higher appeared first on The Motley Fool Australia.

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James Mickleboro does not own any shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Hansen Technologies Limited (ASX: HSN) share price is charging higher on Monday morning.

At the time of writing, the billing technology company’s shares are up 22% to $6.33.

Why is the Hansen share price charging higher?

Investors have been bidding the Hansen share price higher today amid news that the company has received a takeover approach.

According to the release, Hansen has received an unsolicited, preliminary, conditional and non-binding proposal from BGH Capital to acquire 100% of the outstanding shares in Hansen by way of a scheme of arrangement for a price of $6.50 cash per share.

Based on the Hansen share price at the close of play on Friday, this takeover offer represents a 25% premium. This will be reduced by the value of any dividends or other distributions declared, proposed or paid after the date of the offer letter. The price also assumes that Hansen achieves its FY 2021 earnings guidance.

What now?

The Hansen Board has considered the proposal, taking into account the prospects of the company and their aim of maximising value for shareholders. Following this, it has determined that progressing the proposal is in the interests of all shareholders.

The directors of Hansen, other than Andrew Hansen, intend to unanimously recommend the proposal to shareholders, subject to the parties entering into a binding scheme implementation deed and the independent expert’s report.

Whereas Hansen’s Managing Director and CEO, Andrew Hansen, has agreed to work together exclusively with BGH Capital to seek to implement the proposal pursuant to a co-operation agreement. As part of the agreement, Mr Hansen has agreed to vote in favour of any scheme of arrangement and will not vote in favour of any competing proposal during an exclusivity period.

In the meantime, Hansen will continue to keep the market informed of any material developments in accordance with its continuous disclosure requirements.

It has also warned that there is no certainty that the proposal will result in a transaction being put forward to shareholders for consideration. As a result, shareholders do not need to take any action in relation to the proposal at this time.

The post Hansen (ASX:HSN) share price rockets 22% on takeover approach appeared first on The Motley Fool Australia.

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James Mickleboro does not own any shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Hansen Technologies. The Motley Fool Australia has recommended Hansen Technologies. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The SkyCity Entertainment Group Limited (ASX: SKC) share price is under pressure on Monday morning.

At the time of writing, the casino and resorts operator’s shares are down 9% to $3.08.

Why is the SKyCity share price under pressure?

Investors have been selling the company’s shares this morning after it revealed that AUSTRAC has identified potential serious non-compliance by SkyCity Adelaide.

This non-compliance relates to the Australian Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 and the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007.

According to the release, the potential serious non-compliance includes concerns relating to ongoing customer due diligence, adopting and maintaining an AML/CTF Program, and compliance with Part A of an AML/CTF Program.

These concerns were identified during the course of a compliance assessment which was commenced by AUSTRAC back in September 2019. It was focusing on SkyCity Adelaide’s management of customers identified as high risk and politically exposed persons.

What now?

The matter has been referred to AUSTRAC’s Enforcement Team, which has now initiated a formal enforcement investigation into the compliance of the casino.

At this stage, AUSTRAC has made it clear that it hasn’t yet made a decision regarding what the appropriate regulatory response may apply to SkyCity Adelaide. This includes whether any enforcement action will be taken.

SkyCity has advised that it will fully cooperate with AUSTRAC and stressed that it takes its anti-money laundering responsibilities and obligations very seriously. It also notes that it has processes and practices in place in its business to detect and prevent money laundering and continually reviews these to ensure it meets all anti-money laundering requirements.

Crown hit by investigation

In other news, the Crown Resorts Ltd (ASX: CWN) share price is trading lower today after revealing an AUSTRAC investigation of its own.

For the same reasons as above, the regulator has initiated a formal enforcement investigation into the compliance of Crown Perth.

The post SkyCity (ASX:SKC) share price sinks 9% on AUSTRAC news appeared first on The Motley Fool Australia.

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James Mickleboro does not own any shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Telstra Corporation Ltd (ASX: TLS) share price has been having a tough time of late. Shares in the Aussie telco have slid a long way from their $5.80 per share valuation of July 2016.

5 years on, investors are starting to see some positive signs again. In fact, while the S&P/ASX 200 Index (ASX: XJO) was breaking records on Friday, there was one ASX 200 share also quietly climbing higher.

Why is the Telstra share price at a 52-week high?

One of the big issues plaguing Telstra in recent years has been the rollout of the NBN across Australia. The NBN has created intense competition given the significant government support it’s received. Its rollout forced a strategy rethink at Telstra.

Falling profitability and a need for change have weighed on the Telstra share price. Shares in the Aussie telco slumped to just $2.66 per share in October 2020 as investors feared further dividend cuts from the historically blue-chip income share.

But the recent market rebound has helped lift the Telstra share price higher over the last month. Telstra shares closed up 1.7% at $3.58 per share on Friday afternoon, with a $42.6 billion market capitalisation.

The gains have come despite Telstra making no market announcements since 23 April. Shares in rival telco TPG Telecom Ltd (ASX: TPG) also jumped 1.6% on Friday despite no announcements on its end.

There’s no doubt the telecommunications sector has performed strongly in recent times. That momentum could be a factor in the latest Telstra share price gains we’re seeing.

There’s also increasing concern from some investors about the impacts of inflation. Rising inflation would in theory devalue tomorrow’s dollar relative to today’s. In effect, this decreases the real value of future profits from market darlings that promise future earnings but deliver little today in the way of income (or dividends).

As a result, some investors are starting to think about a value rotation strategy. That’s where a portfolio is tilted more towards value stocks that pay dividends today in line with the ‘bird in the hand’ theory. That’s to say: a dollar in the bank today is worth more than potential future profits tomorrow.

Foolish takeaway

Whatever the reasons at the moment, the Telstra share price is certainly a beneficiary. Shares in the telco closed at a 52-week high on Friday as the benchmark ASX 200 index continued to push higher.

The post How has the Telstra (ASX:TLS) share price jumped to a 52-week high appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Reliance Worldwide Corporation Ltd (ASX: RWC) share price had an absolute blinder on Friday. Shares in the plumbing product manufacturer hit $5.46 before slightly retreating to close at $5.40. That was still up an impressive 4.05%. By comparison, the S&P/ASX 200 Index (ASX: XJO) finished the day 0.49% higher.

While there have not been any major market announcements out of the company since late April, there have been several external factors at play that may have been impacting Reliance shares.

Let’s take a look at some of these.

Why the construction industry is booming

Booming property market

As any first home buyer can tell you, the property market in Australia’s capital cities is surging. A recent article published by Domain Holdings Australia Ltd (ASX: DHG) claimed the price of housing in the nation could rise at 10x the rate of wages in 2021! Through a combination of record-low interest rates and high economic growth, the Australian property market has been fuelled to feverish levels.

One reason investors may have been becoming increasingly attracted to Reliance shares could be because they believe the company stands to benefit from the housing boom – as lots of activity in the property market could translate into a surge in property renovations and repairs.

In fact, on Friday the Australian Bureau of Statistics (ABS) confirmed new loan commitments for owner-occupied homes were up 4.3% in April to a record $23 billion. Investor loans increased 2.1% to $8.1 billion – a level not seen since mid-2017. By state, the biggest rises in new loan commitments were in New South Wales and Victoria – up 8.6% and 8.4% respectively. Sydney and Melbourne in particular have seen housing prices soar in recent months.

Construction industry coming up tops

As reported by Thursday’s Australian Financial Review (AFR), the construction industry is also experiencing a highly robust period at the moment. The selling prices of construction services are at their highest on record, and so are input prices and the pace of employment in the industry.

Judging by the new 52-week high for Reliance shares, it seems investors may believe suppliers like it stand to materially benefit from this record-setting period for the industry.

However, the AFR article did also report on fears this ‘era of good-feelings’ could be followed by a sharp bust period.

HomeBuilder second chance

While the federal government’s HomeBuilder program has wrapped up, 9News reported at the start of this month “thousands” of applicants who missed out due to a technical issue with their application will get a second chance to access the scheme that provided grants of up to $25,000 for the construction or renovation of a home.

Shane Oliver, senior economist at AMP Capital, said in April HomeBuilder was likely one reason why the housing industry not only survived but thrived during the pandemic.

This temporary extension of the construction stimulus could also possibly be exciting Reliance investors.

Reliance share price snapshot

Over the past 12 months, the Reliance share price has increased by around 66%. In March, the company paid a dividend of 6 cents per share – its largest in at least 4 years.

Based on the current share price, Reliance has a market capitalisation of around $4.27 billion.

The post Why the Reliance (ASX:RWC) share price hit a 52-week high appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Reliance Worldwide Corporation Limited. The Motley Fool Australia has recommended Reliance Worldwide Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are signs that China’s punishing campaign against Australian commodity exports is backfiring as the country is taught a tough lesson in economics 101.

Two dozen cities across China’s heartland are forced to ration electricity, reported News.com.au.

This is due to a much hotter than usual summer and lack of coal to fire-up their power stations.

Surging commodity prices haunting China

Further, the price of thermal coal is surging. The commodity is up more than 90% over the past year and is trading at its highest level since 2018 at around US$121 a tonne.

While coal prices surge, energy demand has jumped 24% over the same time last year. It isn’t only the unseasonably hot weather that’s to blame.

Power demand from factories is soaring as the Chinese industrial machinery goes to full speed to meet pent-up demand as the world emerges from COVID-19.

Burning cash

It’s also reported that 16 or 18 power plants owned by one of China’s largest power utilities, Guangdong Energy Group Co, is running at a loss in the first quarter of 2021, according to News.com.au.

The Chinese government is prioritising home cooling over industrial production. This is forcing factory owners to operate at night and panic buy portable power generators. This reminds me of the toilet paper frenzy that hit our supermarkets.

In case you forgot, China banned the import of Australian coal as it seeks to punish the Morrison Government.

ASX shares beating Beijing

ASX coal miners finally have a reason to feel more upbeat. The Whitehaven Coal Ltd (ASX: WHC) share price and New Hope Corporation Limited (ASX: NHC) share price have rallied recently.

The Chinese government isn’t one for admitting defeat. It said that the problem isn’t linked to the Australian coal ban and that domestic supply of coal is sufficient to meet demand.

I am not sure who believes that but China is pointing to similar issues in Japan and Taiwan.

Hot weather playing havoc

However, Japan has little reliance on coal for power and it’s also suffering from an extremely hot summer.

Meanwhile, the lack of rain in Taiwan is holding back the county’s hydroelectric power generation.

Ask any economists that isn’t employed by China and they will tell you that China’s ban on our coal has curtailed supply to that market and is contributing to the problem.

China at war with several ASX shares

Let’s also not forget that Beijing has slapped prohibitive duties on other Australian goods, including barley, wine and seafood.

Coincidentally, global food prices have surged to a decade high too. Droughts in countries like Brazil and other supply chain disruptions caused by COVID-19 are to be blamed.

There’s less evidence that these bully-boy tactics are coming back to bite the Asian giant in the posterior. But it’s never a good idea to cut off a major supplier at a time of rising prices.

The post China losing the war against these ASX shares appeared first on The Motley Fool Australia.

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The Commonwealth Bank of Australia (ASX: CBA) share price continued to set new record highs last week. On Friday CBA shares hit an intraday, all-time high of $102.64 before closing the session at $102.52.

Last week, the Australian Bureau of Statistics (ABS) reported key lending indicators for new borrower-accepted finance commitments for housing, personal and business loans. The data could point to a continued recovery in consumer and business confidence, and for the broader Australian economy.

ABS lending indicators surge to record highs

The ABS reported that the value of new loan commitments for housing, owner-occupiers and investors increased 3.7%, 4.3% and 2.1% respectively in seasonally adjusted terms, in April 2021.

ABS head of finance and wealth Katherine Keenan said:

The value of new loan commitments for owner occupier housing reached another all-time high in April 2021, up 4.3 per cent to $23.0 billion. New loan commitments for investors rose 2.1 per cent to $8.1 billion, which was the highest level since mid-2017

The rise in owner occupier lending was driven by increased loan commitments for existing dwellings, which rose 9.2 per cent. Loan commitments to owner occupiers for the construction of new dwellings fell by 11.4 per cent, following a fall of 14.8 per cent in March. These were the first monthly declines since the Homebuilder grant was introduced in June 2020. However, the value of construction commitments remained at a high level.

From a year-on-year perspective, new borrower-accepted loan commitments for housing, owner occupier and investor increased 68.2%, 70.1% and 63.0% respectively in April.

In terms of business finance in April, the value of new loan commitments for construction fell 10.5% while loans for purchase of property rose 27.8%.

CBA share price at all-time highs

May was a breakthrough month for the CBA share price, closing above the iconic $100 mark for the first time ever. The move to record highs was supported by the bank’s continued momentum in earnings, evidenced by its third-quarter results.

In the March quarter, CommBank delivered a cash net profit after tax of $2.4 billion, almost doubling the weak $1.3 billion from a year ago, and also topping the $1.70 billion in 2019 and $2.35 billion in 2018. The results release pointed to the following aspects driving the bank’s solid earnings.

The Bank’s franchise strength was again evident with above system growth in home loans supported by strong funding volumes and continued focus on credit decisioning turnaround times. Domestic business lending continued to grow at more than three times system, with diversified growth across sectors. Household deposits growth was also above system, growing by $4bn in the quarter

The post The CBA (ASX:CBA) share price made another record high last week appeared first on The Motley Fool Australia.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned.  The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of AMC Entertainment (NYSE: AMC) skyrocketed 160.4% in May, according to data from S&P Global Market Intelligence. The largest movie theater company in the world became the latest poster child of meme stock mania, as Reddit message board WallStreetBets fueled a massive spike in this beaten-down, highly shorted stock as the economy inched closer to a full reopening.

The massive move came in spite of a first quarter earnings report showing a huge cash burn of $325 million, more dilutive equity sales to keep itself afloat, and the company’s largest shareholder for the past nine years selling its entire stake.

With all of that going on, you might have expected the stock to go down. But of course, this is 2021, the year of the meme stock! So what the heck is going on?

So what

While AMC did report substantial first quarter cash burn at the beginning of the month, its U.S. theaters were only operating at 15% to 60% capacity in the March quarter, and only 27% of international theaters were open, also at limited capacity. With vaccinations accelerating faster than thought since March, reopening optimism apparently reignited the WallStreetBets message board on Reddit, because AMC’s stock began appreciating shortly after earnings.

On May 13, a few days after earnings, AMC sold another 43 million shares for $428 million, at nearly $10 per share. Given that the company had sold shares in the low-single digits last fall and winter, selling shares at $10 may have seemed like a great deal… if only management knew what was coming!

In the wake of the equity raise, sell-side analysts at B. Riley upgraded the stock, saying the raise likely lessened the need for more capital ahead of an industry recovery. While that bullish call bolstered the stock further, B. Riley only raised its price target from $13 to $16 — less than half of where shares trade now.

Then, as the stock climbed toward $12, Dalian Wanda, the Chinese group that had originally purchased AMC in 2012, sold all of its remaining shares on May 21. While most would take that as a hugely bearish sign, the stock inexplicably went on an enormous tear immediately thereafter, more than doubling to $26 per share by the end of the month.

Why did that happen? It’s hard to say. On May 26, sell-side firm CFRA upgraded AMC, but only from “Sell” to “Neutral” and giving an $18 price target. That coincided with the hashtag “#AMCSTRONG” trending on Twitter. The stock rallied about 20% that day and continued to rise through the end of the month. A short squeeze likely played into things, as nearly 20% of shares outstanding were sold short heading into May.

Now what

The stock’s rise has continued into June, along with more capital raises. On June 1, the company raised $230.5 million at $27.12 per share from hedge fund Murdick Capital. The stock surged 20% on the news, and Murdick sold all of its stake that same day, telling clients shares were “massively overvalued,” according to Bloomberg.

Murdick had also owned AMC’s debt, likely at distressed prices, so the equity raise may have been a ploy to increase the value of its debt by increasing AMC’s creditworthiness. Although a savvy trade by Murdick, it apparently sold too early as well, as AMC’s shares skyrocketed over 100% the next day, reaching a high of $72.62, and prompting trading halts. Incredibly, AMC was allowed to sell another 11.5 million more shares to the public the following day at $50.85 per share, raising a whopping $587.4 million while only minimally diluting shareholders. Shares ended last week at $47.91.

All in all, AMC has raised $1.246 billion this quarter, adding to the $813.1 million in cash it had at the end of the first quarter. The company is still likely burning through cash, so it likely has a little less than $2 billion in cash against a still-high $5.46 billion in debt — and some of that at very high interest rates. The company’s share count has also nearly quintupled from pre-pandemic levels to 502 million shares outstanding.

Ironically, with investors bidding up the stock and the company selling shares, likely well above intrinsic value, AMC has likely fended off bankruptcy for the foreseeable future and actually increased the intrinsic value of the company. For instance, if a company is really worth $1, but is able to sell shares at $10, let’s say, doubling its share count, it increases the company’s intrinsic value from $1 to $6 ($1 plus $5 per share in cash).

The problem? It’s still worth $6 — less than the $10 price at which investors bought shares. Ironically, the more shares the company sells above intrinsic value, the closer intrinsic value will move toward the sale price, but it will never exceed that value.

The big exception to that rule is if the company can use that cash to make high-return investments that will increase intrinsic value going forward. That is also possible, as CEO Adam Aron said on the Murdick capital announcement that “it was time for AMC to go on offense again,” saying AMC is pursuing the high-end deluxe theater chain Arclight Cinemas in California, which went bankrupt this year as a result of the pandemic, as well as other “highly attractive theater opportunities.”

So if AMC sold shares at high prices, and can then buy high-quality theaters at bargain prices, and if movie-going bounces back in a big way, it could in fact create value above where the company sold shares.

However, that still seems like a long shot. In 2019, before the pandemic, AMC reported “adjusted” free cash flow of $358 million — and that figure incorporated some generous adjustments. Still, assuming AMC can get back to its prior free cash flow on the new quintupled share count, that’s only about $0.71 per share. So, at the current stock price, shares are valued at 67.5 times 2019 adjusted free cash flow per share.

Of course, movie theaters weren’t exactly a growth industry prior to COVID, and could very well struggle to fully bounce back. Studios are shortening the window for theater exclusivity, and some may even begin releasing titles directly to streaming services in conjunction with theater releases.

While accretive theater acquisitions could add value, I doubt any acquisitions would materially increase AMC’s free cash flow, since AMC already has massive scale as the largest theater chain in the world.

Basically, shares seem massively overvalued from a fundamental point of view, and the stock is extremely risky at these levels. That doesn’t mean investors can’t make money on technical buying bursts like we’ve seen over the past month, but that’s not really investing; it’s subscribing to the greater fool theory.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why AMC Entertainment skyrocketed 160.4% in May appeared first on The Motley Fool Australia.

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Billy Duberstein has the following options: short January 2022 $3 puts on AMC Entertainment Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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