AMC Entertainment (AMC -5.17%) has been one of the biggest surprises of the year.

The meme stock is up more than 2,300% this year -- not because of its business performance, but because millions of investors on Reddit and other social media platforms have taken up an interest in the stock, banding together to push the price higher through short squeezes and pumping the stock more generally.

Those massive gains have come even as AMC has significantly diluted shareholders over the last year in order to stay afloat during the pandemic. Shares outstanding have ballooned from around 100 million a year ago to 500 million as of June 3. Normally, such share dilution would send investors scurrying, but in the upside-down world of meme stocks, the new offerings have had the opposite effect.

Investors have bid the stock higher nearly every time the company has sold new shares. That phenomenon was on display again last week when the company filed to sell an additional 25 million shares at the shareholder meeting next month, pending shareholder approval, which would bring the total to nearly 550 million. Shares jumped again on Monday in the wake of that announcement, and again after the company announced a new investor rewards program last week, a savvy way to strengthen ties with its base of retail investors and encourage them to continue to support the stock.

AMC's skyrocketing share price in no way reflects an improvement in the underlying business. In fact, the world's biggest movie theater chain is considerably worse off than it was before the pandemic, as the company has had to pile on debt, suspend its dividend, and incur billions in losses with its theaters closed. The global health crisis has also led to increased uncertainty about the future of the movie theater industry, as the growth of streaming has dramatically accelerated over the last year. 

AMC's market cap briefly topped $30 billion last year, whereas before the pandemic it was never above $5 billion. In other words, there's a huge disconnect between the stock price and the value of the company.

The entrance to an AMC multiplex.

Image source: AMC Entertainment.

One simple way to take advantage

Like any other clever CEO would, AMC CEO Adam Aron recognizes the unique relationship between AMC and its shareholder base. He gave a nod to the group, who often refer to themselves as apes, in the company's most recent earnings call, saying both he and AMC had each donated $50,000 to the Dian Fossey Gorilla Fund to help save endangered gorillas in Africa. Last week, the release of AMC Investor Connect, a new portal for AMC's retail investors that comes with rewards like free popcorn, also gave the entertainment stock a jolt -- shares nearly doubled in one day.

Though he hasn't said so, Aron likely recognizes that the best way to make the actual business a success is to take advantage of the sky-high stock price to sell new shares. The company is bloated with debt and is likely behind on the kind of maintenance spending that brick-and-mortar businesses tend to require. AMC had $5.5 billion in debt as of its most recent earnings report, and the company is facing at least one more quarter of losses.

The only easy way to erase the giant debt burden, much of which is at double-digit interest rates, is to sell new stock in order to pay it down. At its current stock price, the company could raise enough cash to pay off that debt by selling 100 million new shares, which would only dilute shareholders by 20%. Considering the warm response shareholders have thus far had to dilution, such a plan could raise the stock price even further.

Similarly, raising cash to invest in the business, improve theaters, and potentially acquire struggling movie theater chains also looks like a smart move with the current share price above $50. At that price, AMC could raise $1 billion by diluting shareholders by only 2.5%.

Will it happen?

Bloomberg reported on Monday that the SEC is paying attention to manipulation and misconduct in meme stocks like AMC, and continued stock sales could further encourage regulators' interest.

Putting that aside, selling more stock seems like a no-brainer at this point, as the massive surge in AMC's share price has given Aron access to what's essentially free money. If there's any hope for the underlying business to make a recovery, AMC needs to raise billions more in cash soon. With his overtures to the retail investing base, Aron seems to understand the virtuous cycle in which pleasing the investor base leads to an elevated stock price, which in turn allows easy access to a capital.

A recovery is still far from certain, but at least a path to it is visible.