Why AMC Entertainment Stock Soared Again Friday - The Motley Fool

What happened

Vegas has reopened, but you don't need to go there: Betting on AMC Entertainment Holdings (NYSE:AMC) stock should do the trick. AMC shares have now almost tripled just this week, including another 25% surge as of 10 a.m. EDT this morning.

AMC data by YCharts.

So what

As of mid-May, more than 20% of AMC shares were still held short, and traders are trying -- successfully -- to drive another short squeeze. A concerted effort by retail traders on Reddit's WallStreetBets forum, and possibly institutional players as well, continues to drive shares of the theater operator higher.

stock traders cheering in room with many monitors showing stock charts.

Image source: Getty Images.

Now what

There is a fundamental case for AMC's business to improve. The earlier spike in shares gave the company an opportunity to raise more capital and stave off any thoughts of bankruptcy in the short term. In January, CEO Adam Aron told investors that after raising over $900 million since December 2020, the company had successfully navigated the shutdowns and restrictions on theaters, adding, "This means that any talk of an imminent bankruptcy for AMC is completely off the table." And the company has raised more money since then.

But during the pandemic, the shares sold to raise capital have catapulted the outstanding share count to more than 450 million, more than four times the prior level. And the company's market capitalization has now soared to more than $15 billion.

The underlying business is recovering, but the new normal might not even be the same for theaters as movies are released for streaming at the same time in some cases. But even if the business gets back to 2019 levels, the valuation is currently about 20 times adjusted EBITDA. And the company has to eventually deal with more than $5.5 billion in debt.

But that's not the point. Fundamentals don't matter here. It's a game being played, and for now it's working. It remains to be seen who will be left without a chair when the music stops at some point.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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