The AMC Entertainment bubble is finally deflating after being down by a whopping 31% to $18 year to date. The pain may be just beginning. Management is making questionable decisions with shareholder capital, as the company's financials continue to struggle. Let's dig deeper.
AMC Entertainment was devastated by the coronaviruses and had to delay movie releases in 2020 and 2021. The community of meme traders who flocked to its stock by accepting volatile assets like Dogecoin have embraced the company. Management seems to have taken things too far.
The image is from the same source.
In March, the company purchased a 22% stake in a gold mining company. Aron claims that the same situation that AMC was in during its crisis is currently being faced by Hycroft. Management thinks this could be the first of many future investments in distressed assets. This could be bad news for AMC's shareholders.
The industries that AMC is speculating in have nothing to do with movie theater operations. It's not clear what assistance it will be able to give these companies, aside from a hype-driven boost to their share prices. The stock movement that boosted the company's stock price and gave it room to reduce its capital expenditures may be the reason the company skirted bankruptcy.
AMC has a weak balance sheet and its new strategy is risky. Despite seeing fourth-quarter revenue rebound from $162.5 million to $1.2 billion year over year, it owes $5.4 billion in corporate borrowings, compared to just $1.6 billion in cash and equivalents. The company has a net loss of $134 million in the period.
It looks foolish for AMC to use its cash to invest in companies that are not safe. The company has already been ravaged by continued equity dilution, which could be paid for by investors.
Between 2020 and 2021, AMC's average shares outstanding went up 231%. If the company needs to raise capital to fund more investments, the dilution could continue. If the new capital is not used to create value, it can hurt investors by reducing their ownership of the company and their claim to its earnings.
AMC may be transitioning to a holding company that invests in distressed stocks in addition to its movie theater business, inspired by its narrow escape from bankruptcy. AMC has a weak balance sheet and lacks expertise in industries other than movie theater operations. As management pivots to this questionable new strategy, investors could face significant equity dilution.Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. score=27.9>
Will Ebiefung has no position in any of the mentioned stocks. The stocks mentioned have no position in The Motley Fool. There is a disclosure policy for The Motley Fool.