AMC Entertainment Holdings (NYSE:AMC) shares are trending downward. From Sept. 15 to Sept. 21, the stock is down 17.9%. The company is not a stranger to volatility. The stock price has climbed from $5 per share to $62 and back down to $39 in 2021.

That kind of volatility is typically rare, but AMC has grasped the attention of a group of Reddit traders who intend to pull off a short squeeze. As a result, the frequent buying and selling is creating turbulence in the stock price. Nevertheless, those trades are not often related to AMC's business prospects, which are improving but still very poor. So did this recent drop in AMC's stock price make it an attractive investment? 

A group of children in a theater.

Image source: Getty Images.

Moviegoers no longer want the same old experience

AMC is in the business of showing films on the big screen. The company needs to bring in large groups of people to justify the high expenses of the physical infrastructure of movie theaters. Unfortunately, fewer folks are going to theaters. Movie ticket sales peaked in the U.S. and Canada in 2002 at 1.57 billion. They have been on a steady decline since then, dropping to 1.24 billion in 2019.

The decrease can be attributed to several reasons, including little innovation, rising competition from substitute entertainment options, and unfavorable pricing. The only major piece of innovation to come out of AMC in the last two decades is replacing cloth seats with leather reclining chairs. The upgrade was undoubtedly expensive, considering the material and labor required, and didn't increase people's interest in theaters. 

The big screen and high-quality surround sound in theaters used to be a significant draw; however, that advantage is decreasing over time. TV manufacturers have innovated rapidly and are delivering high-quality big-screen TVs to people's homes at affordable prices. If you can get an excellent viewing experience in the comfort of your home, you're less likely to make an effort to go to a theater. 

Finally, the price to watch a film in the theater compared to streaming a movie is firmly against AMC. Taking a family of four to AMC to watch a movie with popcorn and soda will run you close to $100 (prices will vary by a few dollars per ticket depending on location). Compare that to a Netflix subscription, which costs less than $1 per day to entertain the family all month. 

The industry neglected to adapt to changing consumer tastes, arrogantly raised prices on tickets and concessions, and made investments on features people were not very keen on. It has all led to fewer people visiting theaters. The financial devastations caused by the pandemic could mean the industry never recovers to even 2019 levels of revenue and attendance. 

AMC's prospects over the next few years are grim 

To make matters worse, AMC has $5.5 billion of debt on its balance sheet. The interest expenses for corporate borrowings, which have reached $240 million in its first two quarters of 2021, are a burden on operations, and the company must consider how it's going to pay back the principal amounts when they come due. The company has only earned over $240 million in operating income three times in the last decade, and just barely on two of those three occasions.

At this point, it does not seem likely it will earn enough money to pay back the $5.5 billion of debt from its operations. Its other hope is to improve the business enough to refinance the debt at better rates. 

Management has already sold nearly all the stock it is authorized to sell to raise cash. When it approached shareholders on the prospects of increasing authorization for a stock sale to raise more cash, they were against the idea. They are thinking about a short squeeze, not the long-term viability of the business, and increasing the share count could potentially hurt that intent while diluting the value of their existing stock holdings.

Therefore, despite the sell-off, the stock is still too expensive to buy. The company has lost money on the bottom line in three out of the last four years, and there is little hope of the industry returning to growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.