AMC Stock Surges on Bitcoin News—Meme Stocks Making a Comeback?

Key Points

• A recent 20% breakout in shares of AMC Entertainment might be driving some investors to wonder whether meme stocks are back.
• Management announced, along with GameStop, that it will be investing in Bitcoin for its balance sheet.
• A similar strategy in MicroStrategy suggests this won't end well for breakout buyers.

Ever since the COVID-19 days of the meme stock saga, a couple of companies have fallen into a cycle that has been repeating since then. Investors get excited about a potential chance to multiply their wealth, only to find that what they have invested in doesn’t actually justify the value they paid, much less a higher one that will bring them any profits. This episode seems to be happening again.

The GameStop Corp. NYSE: GME saga that started the retail sector meme stock mania of the early 2020s spread to another name with a similar setup. Shares of AMC Entertainment Holdings Inc. NYSE: AMC followed suit in the way that investors bought into management’s fantasy pitch for a turnaround and revolutionizing movie theatres, even though five years later, nothing has happened.

As investors will find out in just a minute, today’s rally in AMC stock is nothing but the latest round of what could be called a “Pump” in the sock price, so that the company can issue more expensive shares to raise capital, and then the market’s sense of logic comes back to bring the stock price down to where it should be, if not lower due to this new share dilution.

What’s Behind the Rally in AMC?

Over the past trading week, shares of AMC rallied just under 20% from their low level of $3.05 per share to $3.55. The reason behind this jump was a news announcement declaring AMC would invest in Bitcoin to improve and upgrade its payment systems and bring more value to its balance sheet.

Now, this may sound similar to a recent breakout in another company that has been diluting shareholders through issuing more stock, only to buy more Bitcoin for its balance sheet and make it seem like the company is worth much more than it actually is.

MicroStrategy Inc. NASDAQ: MSTR has broken out over the past 12 months to an obscene performance of 382%, and the basis behind this rally is what matters to investors trying to figure out whether there’s any substance to this recent AMC rally.

By diluting shareholders, MicroStrategy used this new capital to buy Bitcoin at the market price, which is already trading near all-time highs (not a great risk-to-reward setup). In exchange, the company has successfully bloated its balance sheet and boosted its book value.

If MicroStrategy makes no revenue outside of share dilution, is it really that much different than buying a leveraged fund that only buys Bitcoin? The answer is no; there’s no difference. Then here’s what happens. MicroStrategy does extremely well when Bitcoin does well, but if Bitcoin pulls back, investors are in for a world of pain.

Given that AMC and GameStop are now colliding to pursue a similar strategy, investors would be best served by staying away from the charts altogether, lest they be tempted to buy into any further breakouts, which would have no substance other than a Bitcoin pump.

Is There Really no Value?

For AMC, as a company, the answer is not really. Through its rights and some fixed assets, the company does have a basement valuation so to speak. Still, there is no path to growing this basement value, and here are some financial figures for investors to take that message home.

One of the most important measures in a company’s financials is free cash flow (operating cash flow minus capital expenditures), since it can give investors a measure of whether further dilution or debt has to be considered moving forward. In the case of AMC, the latest quarterly results suggest this.

A net operating loss of $31.5 million would leave the company with nearly $100 million of negative free cash flow after capital expenditures of $60.7 million. The conclusion is that the company cannot make a profit as it currently stands, and buying Bitcoin for its balance sheet (through share dilution) won’t change that.

 This would also explain why the company has no book value to measure or value from since investors in it have to carry the burden of debts overwhelming the few assets that are still present. In plain English, investors would be buying a company with a negative net worth and one that makes no profit.

On that note, any and all breakouts on fantasy news from management and Bitcoin or other technology should be taken with a grain of salt unless investors want to risk being stuck in another meme stock rug pull.