Of AMC and APES

Date: 03/09/2023
Author: Mr. X


Live by the meme stock, die by the meme stock.

AMC Entertainment [AMC] has been one of the most notorious meme stocks. And CEO Adam Aron has tried to harness its power. The results have not gone well.

AMC hit an all-time high of $72.62 on June 2, 2021. The stock rose because retail traders during the height of the pandemic trade boom seized on the stock. Much of this was driven because of the odds of a so-called “short squeeze.” The idea was that AMC was going to have disclose all the stocks that were in circulation and would be prevented from issuing more shares. The lock was in. Traders called themselves “Apes” based on “Return of the Apes” and the cry that “apes together strong.”

If traders held together and didn’t sell their shares, the stock would eventually increase to ridiculous heights. In the short term, this benefitted the company. With the entire industry reeling, AMC was able to raise capital using the high prices of the stock and form a bridge to survival. Thus, Adam Aron learned into the meme stock label and started cheering on the “apes.”

However, there was a fundamental contradiction at the heart of this. The company’s main interest was raising capital. The shareholders main interest was in a short-squeeze being executed and selling the stock at a high double digits or even triple digits. There’s also an undeniable element of bad faith for some of the people out there who were encouraging traders that there was a certain gain at the end of this. In truth, no gain is certain.

On August 22, AMC attempted to get around the contradiction by issuing AMC Preferred Equity units. These were called, you guessed it, APEs.

Yet this tribute is not what AMC shareholders really wanted. What they want is the short squeeze so they can sell. Aron’s interest is in raising capital for the company, which requires that he play along with retail traders, but never actually give them what they want.

The conflict is now coming to a head. In less than a week, on March 14, AMC shareholders will vote on three proposals. First, they will vote on whether APE shares can convert into common shares. Second, there will be a reverse split on common shares at 10:1. Finally, AMC will reportedly get even more flexibility to increase equity in the future. Aron is arguing that this will actually increase the value of APE shares. This is, to put it bluntly, unlikely.

AMC recently reported its 14th straight quarterly loss, though it beat analyst estimates. The company has arguably been set on a path to doom not just by the pandemic but by the gradual shift towards streaming. AMC has been trying to break out of this by shaking up the way it sells tickets, now reportedly offering “Standard Sightline,” “Value Sightline,” and “Preferred Sightline” tickets. If you want a “value” ticket for example, you have to sit in the front row.

AMC has also tried to integrate shareholders into what Aron calls the company’s “multiyear recovery,” offering Non-Fungible Tokens (NFTs, remember those?) and possibly special benefits. AMC has also flirted with using cryptocurrency for transactions. Yet the crypto collapse and the relative fall in popularity of NFTs has hurt the company’s efforts to raise capital and keep traders on-side.

In late February, a group of shareholders sued AMC to stop the company from diluting AMC shares by issuing APEs. The plaintiff was Pennsylvania Allegheny County Employees’ Retirement System – a remarkable group that must have gone in big on AMC. The hearing will reportedly take place on April 27, though that obviously can change.

Until then, it looks like AMC will get what it wants. Antara Capital has already indicated that it will vote in favor of the company’s proposals. At least some shareholders, those who want the company to continue, will also vote in favor. Unfortunately, New Constructs CEO David Trainer has called AMC a “zombie stock” that may collapse entirely because of its negative cash flow and low amount of cash on hand.

AMC is down more than 62% over the past year, though it is actually up significantly YTD. It may be tempting to go in now as a “swing for the fences” style trade. Yet this seems foolhardy. If AMC brings in big returns, it will be because the long-term interests of the company have been sacrificed. If AMC lasts, it will be because the value of shares has been diluted and AMC’s “multiyear recovery” is hopefully underway. Even if AMC pulls off the financial arrangements it wants and wins its lawsuit, such a recovery is no sure thing in the age of streaming.

Don’t’ go all in on a hypothetical. If the stock drops around $4.00 and you are planning for a long-term play, it might be worth exploring. Until then, we need to see more signals for betting the farm on a short-squeeze.

.Editor’s Note – [I own some AMC and APE but am not planning on any movies in the next 30 days nor have made any in the last 30 days].

 

 

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.

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