What happened

Shares of AMC Entertainment (AMC -5.41%), the world's biggest movie theater chain, were higher in early morning trading today after the company reported second-quarter results that topped analyst estimates. However, the high-priced stock had slipped into negative territory by the afternoon as some investors seemed to take the opportunity to take profits. Others may have recognized that AMC still faces an uphill climb to get back to its prepandemic levels of performance.

After climbing as high as 10% this morning, the meme stock was down 5.3% as of 2:30 p.m. EDT.

The entrance to an AMC multiplex.

Image source: AMC Entertainment.

So what

With all of its domestic theaters and 95% of its international theaters now open, the company reported revenue of $444.7 million for the spring quarter, which easily beat estimates at $375.3 million. Comparisons to the quarter a year ago are irrelevant as nearly all of the company's theaters were closed due to the pandemic, but revenue is still down sharply from 2019, off 70%, showing the theater operator still has a long way to go to return to full strength.

AMC increased its capital reserves in the quarter with another equity raise and finished the quarter with $1.8 billion in cash equivalents, giving it significant capital to make improvements to the business, or acquisitions, as audiences return. However, share dilution has also continued as the company had an average of 480 million shares outstanding during the quarter compared with just over 100 million in Q2 2020, meaning shareholders own a much smaller piece of the business than they once did.

The company continues to burn cash with a free cash flow loss of $251.7 million, nearly equivalent to the quarter a year ago, and on a generally accepted accounting principles (GAAP) basis, it lost $343.6 million in the quarter.

CEO Adam Aron said, "AMC's journey through this pandemic is not finished, and we are not yet out of the woods. However, while there are no guarantees as to what the future will bring in a still infection-impacted world, one can look ahead and envision a happy Hollywood ending to this story."

Now what

As a meme stock, AMC's market value has become separated from the underlying value of the business, so the earnings report may be less relevant than it would for most companies. Playing to the meme theme, Aron said the company would accept Bitcoin as payment by the end of year and was looking into a partnership with fellow meme stock GameStop in response to shareholder demand, though those are unlikely to be material drivers for the business.

The company did make headway with Warner Bros., agreeing to a 45-day exclusivity window for 2022's slate of releases, but succeeding as a theater operator will be more difficult in the streaming era. Given those challenges, the stock's lofty valuation, and the wide losses in the second quarter, a sell-off for the entertainment stock seems like the appropriate response today.