The “meme hangover” continues with AMC Entertainment (NYSE:AMC). Not only has AMC Entertainment stock coughed back all of its 2021 gains. Shares in the movie theater chain trade at a fraction of their pre-meme prices.
While the collapse of the “meme stock” investing trend played an initial role in AMC’s steep price decline, the larger factor behind continued losses has been heavy shareholder dilution.
In order to absorb operating losses, which have persisted post-pandemic, the company has continued to sell newly issued shares of AMC. Although the “show goes on” thanks to these capital raises, longtime investors have paid the cost.
Over the past twelve months alone, AMC has declined by around 93%. Worse yet, even after this big drop, significant downside risk remains. Here’s why.
AMC Entertainment Stock: Box Office Disappoints
Don’t get me wrong. Prospects for AMC’s line of business (motion picture exhibition) are better now than they were during the “meme stock mania” of 2021. During that time, AMC was struggling, because of a sluggish post-COVID recovery in movie theater attendance.
According to Box Office Mojo, total domestic box office receipts totaled just $4.48 billion during 2021, over 60% below the $11.36 billion in box office receipts reported during 2019. Since then, however, movie theaters have made somewhat of a partial recovery. For 2023, domestic box office receipts came in at $8.9 billion.
In terms of numbers more pertinent to AMC Entertainment stock, revenue during 2023 came in at $4.81 billion. That’s around 88% of reported pre-COVID (2019) revenues of $5.47 billion. Although box office figures are expected to drop this year, as William White reported April 1, AMC CEO Adam Aron continues to be optimistic about a further recovery.
Yet as I’ve argued before, don’t count on a Hollywood ending for AMC. A continued box office recovery will probably fail to counter the key factor behind this stock’s steep price decline: never-ending shareholder dilution.
Spiraling Down to New Lows
I may sound like a broken record when it comes to AMC Entertainment stock and its dilution spiral. In prior articles on AMC, I’ve pointed this out as being the main reason why investors should avoid this stock at all costs.
Shareholder dilution isn’t always bad. Companies that raise additional capital through the sale of new equity can sometimes use this cash to finance growth and operational improvement that exceeds the initial negative impact on the per-share value of shares.
Alas, this has not been the case here with AMC. Even as the company has used the proceeds of equity raises to reduce debt, operating losses have stayed persistent. With this, it’s very questionable that the company’s underlying value has increased.
If anything, AMC’s intrinsic value has declined. Since 2021, it has become increasingly uncertain that a return to consistent profitability will ever arrive.
High debt and continued losses mean something else. The pressure is still on for AMC to de-lever. The former meme king has around $4.55 billion outstanding long-term debt.
Hence, why AMC just recently announced yet another dilutive stock sale. News of this $250 million at-the-market equity offering has been the driver of AMC’s latest sell-off.
Another 93% Drop is Very Possible
AMC will likely continue to raise more money. High debt and continued negative cash flow demands it. Given AMC’s latest at-the-market equity raise comes just a few months after the last one, the company may be looking to tap into this funding source on a quarterly basis.
If this happens, the dilution spiral will continue. That’s not all. With meme mania no longer a factor, the market will probably continue to de-rate AMC towards a valuation more on par with peers.
On an EV/EBITDA basis, AMC, with an EV/EBITDA ratio of 22.8. In contrast, Cinemark Holdings (NYSE:CNK) trades at an EV/EBITDA ratio of just 8.4.
Put it all together, and there’s a clear takeaway. After falling 93% over the last twelve months, continue to avoid AMC Entertainment stock, as another 93% drop is very possible.
On the date of publication, Thomas Niel did not hold (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.