June 9, 2021

Market Mayhem: “Buy Our Stock – But Why Would You?”

AMC needs those additional 25 million shares its CEO was lobbying for because it’s been taking advantage of its skyrocketing stock price to issue plenty of new stock.  It raised over $500 million in an ATM offering launched last Thursday, and more than $1.2 billion over the last month.  If you’re scratching your head about why anybody would buy newly issued stock at these valuations, well, according to this excerpt from the risk factors section of AMC’s pro supp, the company’s kind of wondering the same thing:

We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.

That sounds a lot like the disclosure Hertz put in the pro supp for its aborted offering last summer, and in the end, the retail investors who bought into that company did okay. But what are the odds for AMC’s new investors?  According to analysts, they’re not real good – even after the capital raise, one analyst said that AMC’s stock would need to drop by 85% in order to appropriately reflect its intrinsic value.

You can certainly understand why AMC would want to use the opportunity created by the current craziness to raise additional capital, and that’s not an unprecedented step for a company in its position to take. But GameStop and the other similarly situated companies haven’t accompanied their opportunistic financings with aggressive efforts to promote their stock to retail investors at prices they acknowledge to be sky high.

That seems to me to be a very risky approach. If AMC’s valuation tumbles back to earth while it’s sitting on a pile of fresh cash or a nicely cleaned-up balance sheet, my guess is that there will be plenty of activist hedge funds attracted to it not by free popcorn, but by the smell of blood in the water.

John Jenkins