After bouncing back strongly at the start of 2023, AMC Entertainment (NYSE:AMC) stock has traded sideways in more recent months.
Currently at around $5 per share, AMC stock may look tempting, for risk-hungry investors bullish that the popular “meme stock” will soon resume making big moves.
Unfortunately, while shares in the movie theater chain may gear up to make another big move, chances are it won’t be “to the moon,” as the meme traders like to say. Instead, this much-followed stock may have a greater chance of making a big move lower.
Why? It all has to do with resolving a headline-making issue with this company. While this is not to say that shares are fast headed back to pre-meme price levels, this factor may make buying this stock today too risky of a proposition. Let’s take a closer look and find out why.
The Latest With AMC Stock
If you’re currently on the fence about building a position in this stock, chances are you are aware of what I am about to detail. Yet for those unaware, here’s the lowdown on the most material developments with AMC Entertainment lately.
Back in August, the company created a new class of AMC stock. Shareholders received 1 unit of AMC Preferred Shares (NYSE:APE) for each share of AMC stock they held. A few months after that, AMC began selling additional APE equity units to raise more capital.
In hindsight, there was perhaps a good reason to pursue this complicated fundraising method. Already close to its authorized share limit, the company could not raise more funds from the sale of common stock.
With this, it appears management put into action a workaround plan. First, raise more equity in the meantime by selling APE stock.
Then, work to get shareholder approval for a reverse stock split (bringing the share count back below the authorized amount). After that, convert APE units into AMC shares, then proceed with additional capital raising. Although the company has been thrown a curveball regarding these plans, they have by-and-large gone off without a hitch.
What’s Likely Next for Shares
Admittedly, management has not come out and said that creating APE stock was a roundabout way to increase the share count without the approval of AMC stock investors. However, back in February, a group of shareholders alleged that was the case.
Still, this litigation has done little to derail what has become a multi-stage process to recapitalise the company. On March 14, shareholders approved both the proposed reverse stock split, alongside the plan to convert APE stock into AMC stock.
Although the litigation-related issues have yet to clear up, as a Delaware Chancery Court judge has denied a proposed settlement, this roadblock may clear up in the coming months, enabling the company to proceed with its reverse-split and APE conversion plans.
This could be a big negative for AMC shares, especially if the company presumably takes advantage of an increased authorized share count, to issue and sell even more stock. Beyond just the fact that converting APE into AMC will enable short-sellers (including those arbitraging the conversion) to close out positions with less risk of getting squeezed, the dilutive impact of new capital will place additional pressure.
Why it’s Best to Tread Carefully
Sometimes, dilution is not necessarily a dealbreaker. If a company can use newly-issued equity to both pare down debt, as well as improve the operating performance of the underlying business, the end result could still be beneficial to existing shareholders.
However, I wouldn’t count on that being the case here with AMC. Despite recent reports of strong box office results, analysts still expect the company to report negative earnings for the foreseeable future. A recovery to its pre-pandemic level of fiscal performance remains well down the road.
Even if the company manages to re-hit profitability, which it hasn’t been able to achieve since 2018, well before the Covid-19 pandemic, keep in mind that past and likely future dilution could outweigh the positive impact of swinging back to profitability.
With its near-term risks, alongside dimming long-term prospects, tread carefully with AMC stock.
AMC stock earns a C rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.