Let’s try a hypothetical. Imagine that AMC Entertainment (NYSE:AMC) stock hadn’t spent the last six weeks seeing spectacular volatility. Instead of moving from $2 to a high of $19.90 to a current price just below $6, AMC’s 2021 trading looked like that of a more normal stock.

Would AMC stock seem like a buy?

It’s important to note that, hypothetical or not, that’s the most important question. In fact, it’s the only question.

It doesn’t really matter what the past prices were. AMC stock isn’t “cheap” because it’s down 70% from its highs of just two weeks ago. It isn’t “expensive” because it has nearly tripled year-to-date (though that data point is far more relevant).

As far as investors are concerned, the noise about short sellers and gamma squeezes is just that: noise. The incredible volatility of late has created opportunities for nimble and capable traders, but that’s not what we’re concerned with here.

We’re concerned with the core question of whether almost $6 per share is a good price to pay for AMC stock. I don’t believe that it is.

AMC As a Business

Again, we need to ignore the noise and understand AMC Entertainment as a business. It’s not a business that looks all that attractive.

Obviously, the novel coronavirus pandemic has created an enormous headwind for the company. Revenue for the first three quarters of 2020 declined 73% year over year. AMC burned nearly $1 billion in cash, on the back of an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $671 million.

Now, of course, those results don’t necessarily mean AMC is going to lose money forever. Theaters already are reopening. Vaccine distribution should improve, giving consumers more confidence in going to the movies.

We need to look forward. For the same reason I’ve recommended airline stocks despite ugly 2020 numbers, investors could make the case for AMC stock as “return to normalcy” play.

But here’s the core problem. “Normalcy” wasn’t all that good. In 2019, AMC’s revenue was essentially flat year over year. Adjusted EBITDA declined 6.5% even in constant currency. And because of high interest payments and heavy capital expenditures, free cash flow was just $61 million.

It’s not as if the trend was going to improve. Movie theater attendance peaked in 2002. AMC and other chains have improved seating and added amenities to keep revenue roughly intact, but those efforts can’t work forever. Those improvements also required tremendous capital expenditures, which prevented AMC from strengthening its balance sheet.

Whatever an investor thinks of short sellers (and I know they’re unpopular at the moment), there is a logic to why so many focused on AMC stock. If you short a company that heads into bankruptcy, your returns are going to be significant at almost any entry point. And AMC, even before the pandemic, had a real risk of bankruptcy.

The Balance Sheet Problem

The trends in the business are why AMC stock traded at $2 at the beginning of the year. And while that price alone doesn’t suggest that the stock shouldn’t trade at $6, we can say that the news since hasn’t been enough to change the calculus.

Now, bulls will correctly reply that the massive spike in AMC shares has allowed the company to improve its balance sheet. One private equity company converted $600 million in debt into stock. AMC sold over $300 million in equity in its “at the market” program, which raised more cash.

That follows the addition of almost $1 billion in capital between Dec. 14 and Jan. 25, thanks to more equity offerings, an increased credit facility and another debt conversion.

But here’s the catch. AMC’s balance sheet, even with all those moves, isn’t in great shape. The company closed the third quarter with $5.8 billion in debt and $418 million in cash. At the end of 2020 (AMC hasn’t released full-year results yet), debt likely still sits in the $5 billion range. Cash is in the range of $1.5 billion and a chunk of that was burned in Q4. More will be spent in 2021.

This is not a company that’s out of the woods.

The ‘New’ AMC Stock is the Same as the ‘Old’ AMC Stock

And that gets to the core problem here. Even once normalcy returns, AMC stock is going to look much the same as it did before the pandemic.

Debt net of cash at the end of this year probably is in the $4 billion range. It was roughly $4.5 billion at the end of 2019.

The negative long-term trends still hold. If anything, they’ve accelerated. New streaming services have arrived, and existing operators have attracted even more customers. We’ve seen consumers spend up big on home theater and audio systems that only improve the stay-at-home experience. E-commerce growth further pressures shopping mall visitation, an indirect driver for AMC revenue.

At the end of 2019, AMC stock traded at $7.24. But there is much more of that stock at the moment. There were 104 million shares outstanding at Feb. 21, 2020. Between equity offerings and debt conversion, the figure now is at least three times as high. That’s how significantly diluted shareholders have been.

So a single AMC share now trades about 20% lower. But it offers significantly less ownership in a business that even post-pandemic is in roughly the same shape. More importantly, it offers ownership in a business that is not in good shape.

That’s what investors knew before the pandemic. That’s why AMC stock was trading at an all-time low at the end of 2019. Short sellers were not the problem; the business was. Despite all the noise, it’s still the problem now.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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