Meme stock investors have been getting their feet wet by increasing demand for this cinema chain’s stock.
Cinema chain AMC Entertainment Holdings (AMC -12.98 percent) was in the midst of bankruptcy in the midst of the pandemic, but retail investors saved it and made it the center of the viral stock phenomenon that has garnered attention in the last couple of years.
AMC has far escaped the damage it suffered from the current pandemic, however there are some financial problems that could require the company to issue more shares in order to raise additional funds. This is the reason investors need to think twice prior to purchasing shares in this company , and before relying on management to use the funds properly.
The funds to run operations are at a low
The biggest issue with AMC lies in the fact it’s not an sustainable company temporarily affected by COVID-19. AMC was a struggling business prior to the outbreak and its problems were increased as the disease grew. The restrictions associated with the pandemic have diminished for the most of the time and it is evident in the graph below that AMC’s revenue for the quarter is now at levels that are comparable to pre-pandemic.
However, AMC is still losing lots of money. management has noted that operating losses, which is the amount spent on operations that are day-to-day which included day-to-day operations, totaled $76.6 million during the 2nd quarter. But that doesn’t include capital expenditures, which are investments in the business that include upgrading or maintaining theaters, or similar.
Subtracting capital expenditures provides free cash flow, which is the company’s total cash that is generated or burned. For the quarter that ended in February the year, the free cash flow was negative $134.8 million.
Management has noted that the company has around $1.2 billion of liquidity however, the current cash reserves are $965 million. The remainder is accessible via credit cards, but this isn’t the best option since AMC is already carrying $5.5 billion in debt that is long-term and has no cash to help pay for it. The company could require more funds in the next year in the event that it continues burning funds at the current rate.
AMC could require investors to cover the costs
The only option that is realistic would be for AMC to request investors to pay by selling shares of stock. However, shareholders must ask what they will get in return.
The stock isn’t the cheap you believe, despite the shares plummeting significantly from their peak in the 2021 meme stock panic.
First, management has issued a number of million shares, significantly increasing the number of shares. That means that each share represents a smaller portion of the company. This is which is known as diluting.
In addition, the company’s exaggerated share count and debt has increased its value that is higher than its pre-pandemic levels. This means that AMC is already carrying a higher market value than it did prior to COVID-19. What will happen if the market determines AMC isn’t as valuable as it was prior to COVID-19? Absolutely, shareholders could become bag holders in the event that be the stock price reflect the fact.
Tips from the Oracle himself
Warren Buffett once said, “Price is what you payfor, the value you receive.” AMC has profited due to investors who have been focused on the price but failed to consider what AMC is worth.
It is unclear what could take place, but AMC’s uncertain financials may eventually be able to catch up to the stock. Meme stocks such as AMC are extremely speculative, and should only be a tiny component of a diverse portfolio, if even in existence in the first place. A home built on foundations that are weak will eventually fall apart.
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