It’s 2021 all over again, apparently. Global movie-theater chain AMC Entertainment (NYSE:AMC), along with video game retailer GameStop (NYSE:GME), are back in the spotlight. Before anyone gives in to the temptation to go bandwagon-jumping with AMC stock, I strongly recommend taking a few deep breaths and considering the worst-case scenarios.
Expect significant capital losses regardless of your position in the trade. The meme-stock frenzy of 2021 had negative outcomes in 2022 and 2023. In 2024, consider AMC Entertainment as a company, not just a stock. Then, run for the hills and don’t look back.
AMC Entertainment Takes Advantage of the Meme Pump
Before the meme dump, there must be a meme pump. The pump I’m referring to occurred in mid-May, when GameStop stock and AMC stock got the short-squeeze treatment. This happened after meme-stock celebrity “Roaring Kitty” resurfaced on social media for the first time in several years.
Neither GameStop nor AMC Entertainment suddenly improved on a fundamental basis; this was just about a short squeeze, plain and simple. However, AMC Entertainment made a savvy financial move during the meme pump.
I’ll actually give AMC Entertainment’s management credit for seizing the opportunity. According to a summary from Bloomberg, during the meme pump when the share price was peaking, AMC Entertainment paid off “$164 million of its 10% notes due 2026″ with “23.3 million shares of newly-issued stock.”
Those AMC Entertainment creditors might end up regretting that exchange if AMC stock completely crashes. Still, I’ll give credit where it’s due. AMC Entertainment convinced some creditors to accept that deal and thereby reduced the company’s debt load.
Just the Tip of the Debt Iceberg
AMC Entertainment’s investors shouldn’t celebrate this as a major victory, though. As it turns out, $164 million worth of debt is just the tip of a much bigger iceberg.
AMC Entertainment, which recorded a net earnings loss of $163.5 million in this year’s first quarter, had a total long-term debt load of approximately $4.5 billion as of Dec. 31, 2023. With this in mind, the math just doesn’t look good for AMC Entertainment.
Bloomberg mentioned that AMC Entertainment “exchanged around $200 million” of the company’s long-term debt “for shares last year.” I suppose we can add $164 million of paid-off debt to that now.
I don’t know about you, but I’m having trouble getting from Point A to Point B, especially if Point B is a debt-free AMC Entertainment. Furthermore, keep in mind that these aren’t free loans from friends. As time passes, AMC Entertainment will continue to pay interest on its still-sizable debt load.
AMC Stock: Avoidance Is the Best Policy
In 2021 and the following years, many of AMC Entertainment’s investors and short sellers ended up losing a lot of capital. Overall, succeeding at trading meme stocks requires more luck than any sensible person would expect to have.
Just review AMC Entertainment’s financials, and you’ll surely agree that this isn’t the best company to invest in. It’s also dangerous to be an AMC short seller, however, since the tide can turn at any given moment.
Consequently, the best move now is to grab some popcorn and just watch AMC stock from a safe distance.
On the date of publication, David Moadel did not have (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.
