AMC Entertainment (AMC -10.08%) has made it through the darkest days of the pandemic, and it will come out on the other side.

The company reaffirmed that in its fourth-quarter earnings report, saying that it was reopening theaters in major markets like New York and Los Angeles, even as it is burning around $100 million in cash every month. 

Optimism about the reopening later this year along with a likely boost from Reddit traders was enough to lift the stock after its earnings report as shares traded up as much as 10% on Thursday morning.

However, the results shed new light on the company's troubled financial situation coming out of the pandemic, as it's been forced to raise billions of dollars during the crisis to stay alive. It's added $1 billion in high-interest debt to its balance sheet with total corporate borrowings now clocking in at $5.7 billion, but there's a bigger concern for investors here, and its already bloated debt burden helps explain it.

The entrance to an AMC multiplex

Image source: AMC Entertainment.

Massive share dilution

AMC finished 2019 with 103 million shares. By the end of the third quarter, that share count had only increased modestly to an average of 107.7 million, but it then began to explode.

In September, the company announced an at-the-market equity offering program, essentially allowing it to dilute shareholders by selling new stock when it saw the need to do so. Since then, the company has filed to sell 300 million new shares and added 44.4 million in new shares from a debt conversion. 

On the earnings call, CFO Sean Goodman set the record straight, saying that the company had issued 278 million shares through the at-the-market offering. As of March 3, AMC had 450.2 million shares outstanding.

In other words, if you're an AMC shareholder who held from the beginning of 2020 until today, your stake in the company is just 22% of what it was a year ago, as is your share of the company's potential earnings. 

AMC's management deserves some credit for raising the cash necessary to keep the business afloat. But shareholders are now in a terrible position, as it's essentially impossible for the company to generate enough profits to offset that dilution, especially as it's paying about $300 million in annual interest expense.

Part of the reason the company had to dilute shareholders rather than raising new debt, which is generally considered to be cheaper than equity, is because it was so highly leveraged coming into the pandemic, and recent debt raises came with 15% interest rates attached.

Management acknowledged as much on the call as Goodman said, "We will continue to actively explore alternatives to raise additional capital and reduce our leverage." That means shareholders should expect the dilution to continue as the company seeks to pay down its borrowings and convert debt to equity.

The pent-up demand question

If there's a bull case for AMC, it's that pent-up demand will drive a surge in profitability once the pandemic ends. On the call, CEO Adam Aron cited a survey of its Stubs members, who reported that going to the movies was the activity they missed the most. However, that's from a group of confirmed movie-lovers willing to pay for a subscription to see as many flicks at AMC as they want.

The level of demand from the broader public is less clear. While audiences will certainly return to theaters, the case for pent-up demand in the industry seems to be less convincing than in other hard-hit sectors like travel and restaurants, which are inherently social and experiential, making them unsafe during COVID-19.

Movies, on the other hand, have a convenient substitute in at-home entertainment, and streaming options have both proliferated and thrived during the pandemic. Studios have gotten comfortable putting new releases directly on their streaming services, effectively eliminating exhibitors like AMC.

While AMC's revenue may return to pre-pandemic levels, whether it will exceed that is still uncertain, especially given the company's financial challenges and the changes in the market.

Still a sell

Despite an awful year for the business, AMC shares are actually up more than 40% from the start of 2020, primarily because of attention from Reddit traders.

Given the extreme and still-ongoing share dilution, heavy debt burden and interest payments, and the fundamental power shift in the entertainment industry away from movie theaters, the company's future still looks bleak. Now looks like a great time for investors to pocket the profits and sell.