Movie theater chain and beloved meme stock AMC Entertainment (US:AMC) announced robust first quarter performance on Friday that was driven by higher box office sales and improved operating metrics. While AMC stock traded flat on the news, the shares are 12% higher over the last month.

CEO and Chairman Adam Aron was upbeat as always about AMC’s prospects and again reiterating remarks about its focus on innovation and exceptional customer experience. However, the company still faces headwinds coming out of pandemic-related disruptions, and its ability to raise capital will continue to be a critical factor in its recovery.

“We do have issues though as we are not yet out of the woods. While clearly improving, the industry box office is still down below pre-pandemic levels,” Aron tweeted the day after the earnings release. “And it is crucial for us to continue to be able to raise capital if, as and when needed. Still, there is much that’s encouraging.”

The results ended a busy week for AMC investors after trading platform Robinhood Markets (US:HOOD) erroneously announced that the cinema operator had gone bankrupt in an incorrect alert to traders in the days prior to the results. It was not the case and was quickly denied.

Recovery Continues

AMC reported a 21.5% increase in total revenues over the year to $954.4 million in Q1 and beat market forecasts of $940 million. The recovery in sales from the lockdowns during the pandemic is evident in a chart from Fintel’s financials page for AMC.

AMC reported strong box office sales, with nearly 48 million guests attending its theaters in Q1 versus 39 million last year. This was thanks to the continued strength of big-ticket movie releases including “Avatar”, “Ant Man” and “John Wick 4”. The first quarter North American box office sales beat 2022 levels eclipsed 2022 by 29%, totaling more than $1.7 billion.

The recovery in the European box office was even stronger in getting to pre-pandemic norms than that in the U.S. The strong pipeline of scheduled box office titles slated for the rest of 2023 should support continued ticket sale growth.

Underlying profits measured by adjusted EBITDA swung from a loss of $61.7 million to a profit of $7.1 million during the quarter ($6.5 million when adjusted for currency). The result was well ahead of analysts consensus that polled a loss slightly worse than $20 million.

Cash Flows Improve

Free cash flows improved over the year from negative $329.8 million to $237.3 million but continues to be a significant drain on liquidity.

Bottom-line losses narrowed by $101.9 million over the year to $235.5 million. On an underlying basis, adjusted net losses improved to $179.9 million or a loss of 13 cents per share that was still slightly ahead of market expectations for a loss of 16 cents.

Negative free cash flows have continued to improve towards positive levels not seen since 2020.

Market analysts said that the earnings beat was driven by better-than-expected box office sales with road recovery getting better.

Pass the Popcorn

Food and beverage spending spending per customer was highlighted by management as a key positive (given its high profit margin) from the continued recovery out of the pandemic, highlighting $7.99 in the U.S. and $6.90 globally.

On liquidity, AMC had $500 million of cash and about $200 million in an undrawn credit facility which removes the need for financing for at least the next year.

The high leverage with a backdrop of rising interest rates remains a primary concern as negative cash flows will result in more capital being required. It is also worthy to note that AMC still has a deferred rent balance owing of over $100 million.

CEO Aron was optimistic about the company’s prospects, stressing the ongoing recovery in the industry wide box office and AMC’s commitment to innovation and exceptional customer experience. The company’s Q1 2023 performance was its strongest first quarter in four years, and Aron believes that the second quarter of 2023 has already begun with notable success.

“The remainder of the year promises something for everyone, and AMC stands ready to welcome movie-goers in significant numbers,” he told investors.

However, Aron was also transparent about the industry’s extended recovery period, and the company’s ability to raise additional capital will be crucial to its success. Fitch Ratings said Friday that the strike of Hollywood’s writer was unlikely to affect the recovery.

Analysts See Overvalue

Credit Suisse analyst Douglas Mitchelson in a report after the result discussed how sales and profits were modestly ahead of forecasts, but U.S. admissions below expectations, offset by better international admissions.

The analyst thinks that the return to profitable EBITDA is positive for investors but offset by weak free cash flow which causes the firm to maintain its ‘underperform’ call on the stock and $0.95 target on cash flow concerns.

Fintel’s consensus target price of $2.30 suggests analysts still think AMC’s share price is significantly overvalued and could fall 60% over the next year.

Bearish Bets Remain

Fintel short interest data on AMC shows that bearish bets on the stock are still in place. The platform reports that 26.62% of the float is currently shorted (according to NYSE/Cap IQ) with 6.11 days to cover.

Borrow fee rates remain high at 177% but have fallen from April when levels were above 200%.

Fintel’s short squeeze score of 74.78 ranks AMC in the top 16% out of 4,582 securities for a higher likelihood that a short squeeze could occur.

This article originally appeared on Fintel

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