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Investing  | April 15, 2021

The entertainment industry has suffered the most in the pandemic and despite reopening 98% of its locations, the road ahead for AMC Entertainment (NYSE:AMC) looks bumpy. The demand for movie theaters will not come close to pre-pandemic levels for at least the next two years. AMC stock has had a wild ride in 2021, but it does not look promising going forward.

People will be keen on engaging in other social activities that they have avoided for a year now. We have already spent a lot of time indoors, and given a choice, I would always prefer heading outdoors and meeting people instead of sitting in a packed space watching a movie.

Even if that does not happen and consumers return to the theaters, there is something seriously wrong with AMC stock. I am definitely bearish on the stock. With that said, let’s take a look at the investment case for AMC stock.

Massive Share Dilution

At the end of 2019, AMC had 103 million shares. Then, the pandemic hit, and the company was sinking. It had to push cash in the business to survive. Hence, by the end of the third quarter, there were 107.7. million shares held by the company, and it hasn’t stopped since then. Investors must understand the magnitude of share dilution and its impact on their holding.

AMC is burning cash to stay afloat, but the cash is coming from share dilution. In September, it announced an equity offer that allowed dilution of shares by selling new stock whenever the need arises. It has raised more than 300 million new shares and 44.4 million shares through debt conversion.

Currently, the company has 450 million outstanding shares. Heavy dilution is risky, and it makes no sense from a business perspective. If you already own AMC stock, your share in the company is likely much lower today than it was when you bought in. Furthermore, the company is not generating profits, and shareholders can only hope that the company survives the storm so they do not lose all their money.

AMC Entertainment pays about $350 million in interest expenses, and it is only rising. This month, the company has asked the shareholders for approval of a sale of 500 million new shares. This will lead to further dilution. Given the fact that the company has been practicing the same for the past few months, the idea does not sound crazy. But for investors, it is a crazy ride.

All in all, the company has raised more than $2.2 billion in equity and debt, sold over $80 million in assets and converted $600 million of debt in equity. It held $1 billion in cash at the end of February this year.

Even if customers return to the theaters and the company starts to generate revenue, the share dilution could mean a big problem for shareholders. Management needs to limit the sale of new shares and try to look for alternative options to raise funds. If the company continues to dilute shares, it may not have enough cash for the coming year.

The Bottom Line on AMC stock

From a fundamental standpoint, AMC looks risky. The company had a flat revenue in 2019, and it has not been able to generate profits in the last two years. It is far away from getting back to where it was.

The company is also facing stiff competition from streaming platforms, and consumers have gotten used to enjoying their favorite movies from the comfort of their homes. It will continue to operate at a lesser capacity in the theaters, but the operating costs will keep piling up. AMC also has heavy interest liability.

I remain skeptical about the company being able to weather the storm amidst the pandemic. I do not think that the company will be able to gain stability or make money for the next two years. For those reasons, it’s best to avoid AMC stock.

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