AMC Entertainment Holdings' (AMC 8.22%) stock price dropped a precipitous 25% in July after a remarkable rally in 2021. Despite the recent sell-off, shares are still up 1,817% year to date. The company is a favorite among a group of investors who gather together to talk stocks on the social media platform Reddit.
Members of the WallStreetBets group have convinced others to buy and hold the stock with little regard for the company's troublesome business metrics or general investing fundamentals. In fact, group members encourage buyers of AMC stock to ignore fundamentals altogether and wait for the stock to rise "to the moon." A big part of why they think the stock will rise is because they have been maintaining an epic short squeeze, where some of those who have bet on the stock to fall have been forced to buy shares at higher prices to cover their short positions.
The lack of interest from shareholders in AMC's long-run fundamental prospects is another risk in owning the stock.
AMC stock is up over 1,800% in 2021. Image source: Getty Images.
No interest in fundamental improvement
As of June 2, AMC had 502 million shares outstanding. Additionally, AMC revealed it had 4.1 million shareholders, who are holding an average of 120 shares each. AMC also disclosed that a broad base of retail investors owns over 80% of AMC shares.
Undoubtedly, a large part of that group is the Reddit crowd, trying to pull off a short-squeeze with no regard to company fundamentals. It came as little surprise, then, that CEO Adam Aron ended up withdrawing a proposal to sell additional shares of AMC stock to raise equity. AMC management was concerned about the negative feedback such an action would create among this group of shareholders.
More available shares would have diluted the value of existing AMC stock, which might have hurt the short squeeze efforts. However, the sale of that additional shares could have raised over a billion dollars in cash the company needs to pay down its ballooning debt level.
AMC has over $5.4 billion in high-interest-rate debt on its balance sheet. The company paid an interest expense of $151.5 million in the most recent quarter. Annualized that would be over $600 million in interest payments alone for a company that has eclipsed $300 million in operating income just once in the last decade. For a stock that is up over 1,800% year to date and is wildly overvalued, issuing more shares to help pay down some debt is as close as you can get to a no-brainer.
In announcing the proposal's withdrawal, Aron again voiced his opinion that shareholders should have approved the additional stock for sale. Shareholders were not having it. Their short-term interests go against increasing the supply of AMC stock.
What this could mean for investors
In nearly all other public stock investments, shareholders can count on other shareholders to vote in the interest of the company's long-run fundamentals. Not AMC shareholders. Investors who buy into the stock now should be aware that other shareholders are focused not on the company's well-being, but rather on creating a short squeeze.
If the attempted strategy does not work out, investors will be left with an overvalued stock in a company with poor prospects for profitability.
