AMC Entertainment (AMC -4.04%) is riding a wave of euphoria surrounding the reopening of theaters in a number of previously closed states. Its stock is up over 50% in the past month as California and New York have eased their restrictions on going to the movies.

Yet at over $10 per share, the cinema operator's stock is trading at levels not seen in about two years. Forget the ill effects of the COVID-19 pandemic -- AMC was in trouble before that, but its current rally seems to have wiped away all vestiges of the concerns investors previously held.

People in theater with popcorn buckets

Image source: Getty Images.

Raising the curtain on recovery

Obviously, a lot of the gains AMC has enjoyed year to date come as a result of the Reddit rally that sent so-called meme stocks soaring hundreds, if not thousands, of percent higher. But the epic short squeeze happened in January, and it doesn't explain the most recent rally for the stock.

Instead, investors are likely looking at the opportunity the company has to generate more revenue as movie studios begin releasing films again. CEO Adam Aron, who likens his theaters to a car dealership that hasn't had any new cars shipped to its showrooms in over a year, is expecting 40 major films that were delayed in 2020 to be released starting in May.

The company also has sufficient liquidity to see it through 2021 and beyond. While AMC raised $917 million in January to "take bankruptcy completely off the table," according to Aron, the cinema owner completed numerous other debt and equity issuances last year.

And it recently became independent again (to a degree) after Chinese conglomerate Dailin Wanda Group reduced its ownership stake in AMC from almost 38% of outstanding shares -- which gave it about 65% of the voting power -- to under 10%.

There's a lot of positive momentum behind the theater operator, which is partly why the stock has doubled since early February, even after the initial fervor of the Reddit rally subsided.

An intermission worth noting

Yet investors would be wise to use caution here. The movie industry has undergone a sea change over the past year, and some of the most powerful voices in Hollywood say it's never going to revert back to the status quo. Concerns include:

The movie industry evolved in the face of the pandemic, and as Walt Disney CEO Bob Chapek recently said, there is no "going back" to the old Hollywood distribution system.

Beyond cinema's golden age

The current problems AMC and industry peers Cinemark and Regal are facing are numerous, but it seems as though investors have forgotten the many headwinds they were also confronting before the pandemic struck.

AMC was already carrying a significant debt load due to its acquisitions of Odeon & UCI (2016), Carmike Cinemas (2016), and Nordic Cinema Group (2017), a situation that was only exacerbated by the crisis. All those debt and equity offerings will need to be financed and repaid in the future.

According to data from S&P Global Market Intelligence, AMC also significantly diluted its shareholders with shares outstanding more than tripling last year from 103.8 million to 374.1 million shares.

And theater attendance has been weak and falling with total ticket sales down in seven of the past 10 years, which necessitated new strategies like the launch of the Stubs A-List subscription program to win back moviegoers. 

The company was also converting more locations to the dine-in format as a means of upgrading the customer experience. AMC dabbled in streaming NFL football games and launched its own streaming service too.

Alive but not thriving

These were signs of a media company in decline willing to try anything to get people back in its seats. Even though there is pent-up demand for the big-screen experience, AMC still has to address the structural problems that were merely delayed by the pandemic.

It cannot do so simply by reopening more theaters, especially since they will be operating at significantly reduced capacity near term and face much more competition long term.

Investors need to remember that the theater industry is a mature one, despite the fact the market is pricing AMC as a growth stock. The cinema owner survived the latest crisis, but it's difficult to argue the stock is a buy at this price point.