Embattled movie theater chain AMC Entertainment Holdings (AMC -5.41%) remains a popular stock with traders, even if most of the air has come out of the balloon stemming from the epic short squeeze of 2021. Today, the stock is down 90% from the peak of its glory years.

The stock has fallen enough that it's within shouting distance of pre-COVID-19 valuations, and investors can have a real conversation about buying the stock as a long-term investment. That answer depends on the company's ability to turn a profit. Unfortunately, there are some roadblocks to that happening soon. 

Attendance reliability is uncertain

Nobody knows for sure what the long-term impact of the pandemic is on the theater business, but it seems that attendance is taking a hit.

A survey by Morning Consult earlier this year indicated that 62% of respondents felt comfortable enough to attend a movie in a theater, a sign that people are moving past the pandemic. Still, 55% said they are more interested in watching movies from their homes, and 50% blamed high prices as a reason to avoid theaters. In other words, theaters aren't delivering an experience that justifies the effort and money.

This is showing up in AMC's numbers. Attendance for the first six months of 2022 totaled 98.2 million, down from 176.7 million in 2019. That's a 44% drop in attendance from pre-pandemic levels. You can see below that this isn't enough traffic to run the company profitably; operating cash flow is negative, and free cash flow, which includes interest on debt and cash investments into theaters, is worse:

AMC Cash from Operations (Quarterly) Chart

AMC cash from operations (quarterly). Data by YCharts.

Investors should closely follow theater attendance over the coming quarters, which likely must be at least comparable to pre-pandemic levels for AMC to generate cash flow over the long term. The company has $1.1 billion in available liquidity (cash plus open credit lines), so it does have time to right the ship.

Look out for dilution

AMC's long-term survival doesn't necessarily mean it will be a rewarding investment for shareholders. On a positive note, the stock's sky-high valuation after its short squeeze has largely dissipated. Today, its enterprise value, which is its market cap plus its net debt, is still 37% higher than three years ago (pre-pandemic), but it's well off the 400% bump it saw during its squeeze. AMC's current struggle makes that valuation virtually impossible to justify.

Management issued many shares to raise cash during the pandemic, which remains the most significant concern for shareholders today. The company's share count increased nearly 400% over the past three years, decreasing the value of existing shares, which is called dilution. AMC's business could grow as a whole, but investors won't benefit if all of these new shares flooding the market negate any per-share improvement.

In August, AMC issued a special dividend, giving shareholders one unit of AMC Preferred Equity for each common share. Last month, it filed paperwork to sell up to another 425 million of these preferred equity units. Management can convert the preferred units into common shares if the board authorizes and shareholders approve with a vote.

The problem for shareholders is that this results in potentially massive dilution down the road. Converting these preferred units to common stock could increase the existing share count by nearly threefold, which would likely kill per-share investment returns barring a remarkable recovery by AMC's business.

The purpose of these preferred units is to keep access to funding should the company need it, a reminder that AMC will do what it must to stay in business. Until its financials improve to the point that massive dilution is off the table, owning the stock is risky, even after its 90% decline.