Remember the meme stock craze?
AMC Entertainment (NYSE:AMC) stock has been through one helluva story arc over the last couple of years, ultimately to end with a complete roundtrip (and then some).
AMC’s financial struggles continue to persist. The company has been grappling with an enormous debt pile, high cash burn rates, and negative working capital. Net debt amount outstanding is at nearly $4.82 billion. I’m not sure at this point who is in worse financial shape – AMC or the vast majority of credit-card-using movie goers. Memes and conspiracy theories can’t counter that.
To navigate these financial challenges and stave off bankruptcy, AMC has resorted to issuing debt and diluting equity to raise cash.
AMC Must Navigate a Treacherous Plot
Unfortunately, these measures have led to a steep decline in AMC’s share price, further compounding the company’s financial woes. AMC stock had been the darling of the “meme stock” phenomenon. While this had led to some short-term boosts in AMC’s stock price, it has also resulted in extreme volatility and unpredictability. The meme stock rally of 2021 caused significant fluctuations in AMC’s market prices, often disconnected from its underlying business fundamentals.
AMC’s recent decision to sell 40 million more of its shares triggered a significant stock plunge, leading to potential additional future dilution for shareholders. This isn’t good folks. You can’t meme your way out of mismanagement. And to argue that debt doesn’t matter just as the economy may be entering a recession makes no sense.
This equity dilution is a serious warning sign for investors. It signals potential risk of bankruptcy if AMC does not manage to raise enough capital to pay down its debt not just now but in the future.
Fundamentals do matter. Debt does matter. Investing in AMC here is undoubtedly a high-risk proposition.
The company’s financial struggles, high debt load, cash burn issues, and the unpredictability of the meme stock phenomenon all contribute to a highly uncertain outlook. And unfortunately, people do what they always do – get sucked into a narrative that ultimately proves to be a bigger piece of fiction than any movie that could air on the big screen.
The Ending May Be Scary for AMC Stock
Investors considering AMC should be prepared for the possibility of losing all or a significant portion of their investment. The company’s future largely hinges on its ability to raise enough capital to pay down its debt.
Despite hurdles, AMC’s management remains optimistic about the company’s future. The company has shown some signs of resilience in the face of adversity. And its recent box office successes suggest that there may be light at the end of the tunnel. However, the road ahead for AMC is fraught with challenges.
The company will need to navigate a complex and volatile market landscape, tackle its financial issues, and adapt to changing consumer trends. Only time will tell whether it can successfully weather the storm and emerge stronger on the other side.
And if I am right about a credit event, the movie to come will be a horror show for anyone investing in consumer stocks.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.