Some meme-stock traders might not be worried about global movie-theater chain AMC Entertainment’s (NYSE:AMC) financial issues. However, serious investors should take note of AMC Entertainment’s financial condition. They also need to consider the company’s willingness to shell its shares. With these issues in mind, financial traders might be persuaded not to buy AMC stock.
Sure, there will be blockbuster movies now and then, such as the Barbie and Taylor Swift films. Will these be enough to save AMC Entertainment from a downward spiral, though? Only time will tell, but AMC Entertainment’s loyal shareholders (a.k.a. the “Apes”) should think twice before adding to their positions in 2023.
AMC Entertainment’s CEO Acknowledges the Financial Obstacles
Let’s go back in time for a moment, to March 31. Then, AMC Entertainment’s cash position had dwindled to $495.6 million, versus $631.5 million at the same time in 2022.
Later, AMC Entertainment CEO Adam Aron admitted that, despite the success of the Barbie movie, “Moviegoing in 2023 still will be well below 2019 pre-COVID levels.” Furthermore, Aron acknowledged, “The writers and actors strikes create uncertainty ahead. And cash is very tight.”
Additionally, Aron posted an open letter on X, the platform formerly known as Twitter, warning that if AMC Entertainment was unable to raise equity capital, “the risk materially increases of AMC conceivably running out of cash in 2024 or 2025, or of AMC being unable to satisfactorily refinance and stretch out the maturity of some of our debt (which is required of us beginning as early as 2024).”
To help shore up its capital position, AMC Entertainment converted some of its AMC Preferred Equity Units (NYSE:APE) into AMC common shares. However, this had the effect of increasing the AMC common share count.
In a similar move that also increased the AMC share count, AMC Entertainment sold 40 million common shares in an at-the-market equity offering. The company defended this share sale by stating that AMC Entertainment raised $325.5 million through the equity offering.
Weighing the AMC Stock Dilution Issue
You may have seen AMC Entertainment trying to defend its large-scale share issuance. At the same time, however, the company has acknowledged that buying AMC stock is “highly speculative and involves risk.” In addition, AMC Entertainment has warned that its shareholders should be “prepared to incur the risk of losing all or a substantial portion of your investment.”
Does AMC Entertainment’s share sale create a financial “safety net” for the company? If so, I suspect that it’s only a temporary safety net until AMC Entertainment needs money again. At that point, it shouldn’t be too surprising if the company enacts another common stock sale.
I tend to concur with Benchmark analyst Mike Hickey, who noted that “AMC is expected to report a full-year 2023 loss of $386 million.” Hickey observed that “stock sales following the meme rallies have improved” the balance sheets of AMC Entertainment and GameStop (NYSE:GME). However, he also found that “analysts question the long-term viability and valuations of both companies.”
Perhaps worst of all, Aron seems unapologetic about selling so many AMC shares and potentially diluting their value. He once wrote, “The successful completion of this equity offering marks another significant milestone for AMC Entertainment.” However, thoughtful investors might question whether this event was truly a positive “milestone.”
AMC Stock Could Be Detrimental to Your Account
Apparently, AMC Entertainment practically will do whatever it takes to raise capital. That’s not a good thing, necessarily, if you’re a shareholder who’s concerned about dilution.
Moreover, if AMC Entertainment encounters more financial problems, the company is likely to sell more of its common shares. AMC Entertainment’s chief executive doesn’t seem apologetic at all about this capital-raising tactic. Consequently, careful investors shouldn’t buy AMC stock, as it could have a detrimental effect on your portfolio’s long-term returns.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.