Down by a whopping 31% to $18 year to date, the AMC Entertainment (AMC 8.86%) bubble is finally deflating. But the pain may be just beginning. The company's financials continue to struggle, and management is making questionable decisions with shareholder capital. Let's dig deeper.
1. Management might be losing touch
Led by CEO Adam Aron, AMC Entertainment has navigated the coronavirus pandemic, which devastated its operations amid lockdowns and movie release delays in 2020 and 2021. The company has also embraced the community of meme traders who flocked to its stock by accepting volatile assets like Dogecoin and Shiba Inu as payment. But now, management seems to have taken things too far.
In March, the company purchased a 22% stake in near-bankrupt gold mining company Hycroft Mining for $27.9 million. According to Aron, Hycroft is in a position similar to where AMC was during its crisis, boasting solid assets despite liquidity challenges. Management suggests this deal could be the first of many future investments in distressed assets. But this could be bad news for AMC's shareholders.
AMC is speculating in industries that have nothing to do with its expertise in movie theater operations. So it is unclear what assistance it will be able to give these companies (aside from a hype-driven boost to their share prices). And while management may believe they skirted bankruptcy because of their skill, it arguably has more to do with the meme stock movement that boosted the company's stock price and gave it leeway to dilute investors for much-needed capital.
2. AMC's financials are still weak
AMC's new strategy is risky, especially considering its weak balance sheet. Despite seeing fourth-quarter revenue rebound from $162.5 million to $1.2 billion year over year, it owes $5.4 billion in corporate borrowings compared to having just $1.6 billion in cash and equivalents. And the company isn't profitable yet, reporting a net loss of $134 million in the period.
With pressing challenges in AMC's core business, it looks foolhardy for the company to use its much-needed cash to invest in inherently risky near-bankrupt companies. Investors could pay the price of this through continued equity dilution, which has already ravaged the company over the last few years.
AMC's average shares outstanding soared 237% to roughly 514 million between 2020 and 2021. And the dilution could continue if the company needs to raise capital to fund more investments. Equity dilution can hurt investors by reducing their ownership of the company and their claim to its earnings, especially if the new capital is not used to create value.
A meme stock holding company?
Inspired by its narrow escape from bankruptcy, AMC may be transitioning to a holding company that invests in distressed stocks in addition to its movie theater business. This strategy looks risky because of AMC's weak balance sheet and lack of expertise in industries outside of movie theater operations. Investors could face significant equity dilution as management pivots to this questionable new strategy.