When the coronavirus pandemic hit in 2020, one of the worst impacted industries was movie theaters. Shares of AMC Entertainment (AMC -2.86%) plunged, and there was a very real concern that the company would have to declare bankruptcy. And then something unexpected happened: the meme stock craze. And now something perhaps even more astonishing is going on with AMC, but it's a potential problem.
Saved by shareholders
It is hard to disparage AMC Entertainment when it comes to running movie theaters. The company's collection of movie halls tallies to 950 with a screen count of over 10,500. You don't get that big by accident. To be fair, owning movie theaters has been a rough and competitive business for many years, considering the increasing use of at-home digital entertainment services. AMC has basically taken the scale approach, and until it was shut down by the government as a nonessential business, it was handling itself as competently as any peer.
However, being unable to show movies, and thus bring in revenue, was a terrible burden. The company was feared to be on the brink of bankruptcy, with management warning that it could run out of cash. Then the meme stock craze took off, leading AMC's shares to skyrocket as it got caught up in the hysteria. Most long-term investors would have looked at the price increase at AMC as irrational, given its obvious troubles, but sometimes Wall Street isn't rational.
Perhaps to management's credit, AMC seized the moment. It issued stock, despite the fact that the price of the shares appeared to be too high to justify, since they were trading at levels well above where they were before the pandemic.
Saved, but now what?
That cash basically allowed AMC to muddle through the worst of the pandemic shutdowns, and now its business is starting to recover. For example, according to CEO Adam Aron, "AMC's fourth quarter 2021 results represent our strongest quarter in two full years, with positive Adjusted EBITDA of almost $160 million, Operating Cash Generated of more than $220 million and finishing 2021 with a record year-ending liquidity position of more than $1.8 billion."
Positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was certainly nice to see, as was its operating cash generated figure. But the $1.8 billion in liquidity needs to be put in proper context, noting the stock sale from above. The company still lost $0.26 per share on a generally accepted accounting principles (GAAP) basis. The roughly $1.6 billion in cash it has on the balance sheet remains kind of important given it is still bleeding red ink in a highly competitive business facing structural changes (like competition from streaming services from Netflix and Amazon, for example).
So when AMC announced that it was buying a stake in a gold company for roughly $27.9 million, investors should have been a little worried. That sum is, admittedly, tiny relative to the cash on AMC's balance sheet. But what exactly does AMC have to do with gold mining? The answer is clearly nothing, which makes this a massive diversion outside of the company's core business. Most investors probably didn't buy AMC with the idea that it would turn itself into an investment vehicle owning a portfolio of assets unrelated to movie theaters.
AMC wouldn't be the first company to venture outside of its core business. Even iconic Coca-Cola got caught up in such madness when it bought a movie studio in the 1980s. But that Coca-Cola foray ended badly, as have so many others when a company goes outside of what it knows.
Time to jump ship, if you haven't already
AMC's shares have already fallen far below their meme craze highs, but they remain well above where they were prior to the pandemic. While the business is recovering, it is still not quite back to where it was prior to the 2020 shutdown, so the current price remains hard to justify. Add in the fact that a conservative investor might look at the gold stake as management playing fast and loose with shareholders' cash, and there's a material new risk investors have to consider here. There's a name on Wall Street for what's going on at AMC with the gold investment: diworsification. And, frankly, even if the gold deal pans out for AMC, it was still a bad idea for investors to play along.