Why AMC Stock Dropped as Much as 14.6% This Week

What happened

Shares of AMC Entertainment (AMC -2.01%) sank as much as 14.6% this week, according to data from S&P Global Market Intelligence. The movie theater chain and meme stock faced selling pressure after the company announced it was going to sell up to 425 million units of its AMC Preferred Equity Units (APE). As of this writing at 3:50 p.m. ET, shares of AMC Entertainment are down 11.6% this week. 

So what

In August, AMC Entertainment paid its shareholders a dividend in the form of preferred equity units with the ticker "APE" (the ticker name is a reference to its being a meme stock). This was done as a corporate loophole in the form of a stock split; it allows any holder of APE units to convert their shares into AMC common stock on a one-to-one basis.

So you can see why investors got concerned on Sep. 26 when AMC announced it was authorizing an additional selling of 425 million APE units. With just over 500 million common shares outstanding right now, these new APE units could be highly dilutive for shareholders if they are ever converted into common stock. This is not good for existing AMC shareholders. As shares outstanding rise, the % ownership from your existing shares goes down, all else being equal.

On the flip side, this will potentially raise a lot of money for the beleaguered movie theater chain. At APE's current trading price of $2.73, this new sale of 425 million units could raise over $1 billion.

Now what

AMC needs this money because it is struggling mightily with the movie theater industry in massive decline. Competitor Cineworld Group just filed for bankruptcy, and AMC itself burned almost $500 million in free cash flow through the first six months of this year. Investors and meme stock traders are getting increasingly pessimistic about this business. APE units are down 55% since they started publicly trading in August, and AMC common stock is down 58% year to date.

But don't think now is the time to "buy the dip" on AMC shares. At an enterprise value estimated to be $13 billion, the stock still trades at an expensive valuation relative to its earnings power (or lack thereof). Plus, with the potential dilution coming down the line from these APE units if they get converted into common stock, the price you are paying for AMC shares might be much higher in the near future. Avoid this sketchy meme stock at all costs right now.