AMC Stock’s Descent to Zero Could Be Faster Than You Think

It’s been a rough couple of weeks for AMC Entertainment’s (NYSE:AMC) stock, which declined after its AMC Preferred Equity Units (NYSE:APE) conversion.

NYSE halted trading of both AMC and APE stock, amid the conversion which saw each APE share converted into 0.1 AMC shares.

Prior to this, AMC executed a 1-for-10 reverse stock split and upped authorized shares to 550 million from 524.17 million to facilitate APE conversion.

The conversion yielded 99.54 million AMC shares from 995.4 million APE units on June 30. A litigation settlement required 1 share for every 7.5 owned, totaling 6.91 million shares. 

The total number of shares issued as a result of these moves stand at 158.38 million, providing space for potential future issuance.

With this kind of dilution hitting shareholders, it’s no surprise to see AMC stock trading around $12.50 per share at the time of writing (or $1.25 pre-split). Here’s why I think that number could be headed toward zero in short order.

Little Optimism for AMC Stock

AMC’s tale of revival heading toward profit has dimmed. Investors are seeing their focus shift to the company’s bleak finances and limited growth outlook.

Management’s meme stock actions saved the company from bankruptcy, but doubts remain around whether AMC can grow itself out of this hole. Personally, I don’t think that’s possible, given the company’s debt load and its continued moves to dilute shareholders.

Eventually, all existing shareholders who aren’t self-proclaimed degenerate apes will be out of this stock. At that point, the stock will be worth whatever retail investors will be willing to pay for an ever-increasing number of shares. 

AMC’s financial situation is dire, stemming from both the impact of the pandemic and streaming competition. While the pandemic headwinds are clearly a thing of the past, streaming is likely to provide continued secular headwinds over the long-term.

For many moviegoers, it’s simply a much better experience to stream a movie for free (or even buy it for $10-$20), avoid the price tag associated with popcorn and tickets, and also avoid having someone kick your seat or shine their phone throughout the entire movie. 

AMC’s Reverse Stock Split Backfires

On August 25, AMC has started their 1-for-10 reverse stock split, boosting its price while decreasing shares. Authorized shares increased to 550 million from 524.17 million, enabling its APE conversion.

At the time of writing, APE trading is halted, and these shares have been delisted. What an era that was.

The skeptics turned out to be right, with APE stock having the net effect of allowing the company to dilute existing shareholders to a greater degree than they initially promised.

Converting 995.4 million APE shares as of June 30 into AMC stock will result in the issuance of 99.54 million APE shares.

Litigation settlement payments were made today, granting one share for every 7.5 owned, totaling 6.92 million shares post reverse split. After these processes, AMC foresees a total of 158.38 million outstanding shares.

Shareholders have clearly expressed their dissatisfaction as AMC stock dropped over 70% this month, and APE fell about 25% in parallel. Despite this, Wedbush upgraded AMC to “neutral” from “underperform,” with a $19 target (adjusted for the split, a $1 decrease).

The Decline Continues

AMC has a steep cost to borrow (CTB) fee at 739.99%, indicating high short seller demand. The usual range for CTB is 0.3% to 3%. High CTB might prompt short sellers to cover positions, potentially boosting AMC.

CEO Adam Aron, an active commentator, has been quiet since Aug. 20, but it’s clear that some in the community still believe this is a stock worth betting on for a short squeeze.

It’s my view that AMC is headed to zero. This is a company that’s been poorly run for many years and lost any sort of competitive edge it had in the past.

AMC is likely going to represent a sector that’s completely wiped out and replaced by more nimble and innovative tech companies. Buyer beware.

On the date of publication, Chris MacDonald 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 Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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