The CEO of AMC (NYSE:AMC) recently argued that the company was helping its current shareholders by selling more shares of AMC stock.
“If I was a shareholder, I’d be more concerned that we don’t have shares available to us because I think shares are a very powerful tool to do good things for a company,” the CEO, Adam Aron, said.
But while share sales aren’t always bad for investors, they aren’t always good for them either.
The Best Way to Think About Stocks and Share Sales
A good analogy for buying stocks, in my opinion, is investing in a friend or relative’s small business. For example, let’s say you’ve invested in a friend’s YouTube business.
If the YouTube channel is rapidly gaining viewers, if your friend wants to sell more shares to buy better equipment and spend more on marketing, that sale could ultimately be good for you.
That’s because your friend is using the money to take steps that will grow the business faster and likely ultimately make it profitable. That in turn will make the company more valuable, causing the total value of all of its shares to increase.
So even though you own a smaller part of the company because your friend sold more shares, if the total value of the company rises enough, the value of your stock will still go up.
But let’s examine a totally different scenario. What if your friend is going to use the proceeds from the stock sale to pay off the business’ past credit card debts, ensure that he can continue paying himself an annual salary of $40,000 for awhile and afford his car payments (he often uses the car to pick up guests for his show)? And let’s say his business has been losing $5,000 per month?
Further, you bought a 10% stake in the company for $20,000, but you find out that your friend told someone else that the business’ annual revenue probably will never exceed $50,000 because not that many people are interested in the subject covered by the show. Making matters worse, you find out that your friend never expects the business to be profitable.
In that case, you already spent way too much on your shares. Meanwhile, the sale of the new stock is going to lower the percentage of the company you own without really increasing the overall value of the business. Clearly, in this case the share sales are good for your friend, the owner of the company, but bad for you, the shareholder.
Which Situation Is AMC In?
I believe that the second hypothetical scenario describes AMC’s situation much more than the first. As of the end of last quarter, the company owed $11 billion, roughly double its 2019 sales. It’s definitely going to use a large amount of the proceeds from stock sales just to pay interest and afford its salaries and other expenses.
In 2019, AMC lost $1.44 per share, and I haven’t heard anyone say that the company has bold new ideas that will cause its business to become more successful than ever. Meanwhile, the increased popularity of Netflix (NASDAQ:NFLX) and other streaming services is putting a definite, low ceiling on AMC’s future financial results and, in all likelihood, will prevent it from becoming profitable for the foreseeable future.
Despite all of these points, AMC stock has a market capitalization of $26 billion, well over double the company’s 2019 sales. Anyone who bought the shares for more than $5 each paid too much.
Can the “Apes” Win by Sheer Numbers Anyway?
Ultimately, the stock market is not a “one person, one vote” democracy. The amount of total money that investors and traders are willing to spend buying, selling, and shorting stocks determines the value of shares.
And institutional investors — who have funds from many wealthy people and, in some cases, from millions of government workers — have a tremendous amount of money. Meanwhile, as the government’s stimulus dries up and “apes” (retail investors primarily influenced by social media) spend more of their funds on cryptocurrencies, the amount of money they spend on meme stocks is likely to decline tremendously. And if cryptocurrencies’ value declines further (which I expect to happen), the financial power of the social media crowd will drop.
Several one-time meme stocks are already way off their highs of the last year. Lordstown (NASDAQ:RIDE) is trading at less than one-third of its 52-week high, XpressSpa (NASDAQ:XSPA), which I believe was a meme stock before the term became popular, has tumbled about 70% from its 52-week high, and Koss (NASDAQ:KOSS) is about 80% off its high.
So in some cases, the devotion of the apes has not stopped stocks from plunging. And in the coming months, the apes’ power is likely to drop, not increase.
The Bottom Line on AMC Stock
The popularity of the streaming services is likely to prevent AMC from becoming profitable, and the company doesn’t seem to have new ideas to turn its business around. Meanwhile, its shares are greatly overvalued, and it will probably use the proceeds from its stock sales primarily to pay its debts and its salaries.
Also important is that the “apes” probably won’t be able to defeat institutional investors over the long-term.
Given all of these points, I continue to urge investors to sell AMC stock.
On the date of publication, Larry Ramer held a short position in XSPA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Plug Power and Snap. You can reach him on StockTwits at @larryramer.
