AMC Entertainment (NYSE:AMC) stock is among the meme stocks investors continue to home in on.

Like many beaten-down retail names, AMC faced financial hardship due to the COVID-19 pandemic. However, it was saved from bankruptcy by individual investors who turned its shares into meme stocks.

To improve its financial situation, AMC has pursued various fundraising initiatives and diversification strategies. This includes theater enhancements and unconventional investments like a popcorn company and a gold mine.

AMC’s financial outlook remains uncertain in 2023, with a potential risk of bankruptcy looming.

The company’s weakened financial position may suggest that its current price exceeds its true value. 

In this article, I will delve into AMC’s financials, discuss its potential risks and rewards, and assess how much runway the company has from here.

AMC’s Dilemma in Recent Years

AMC Entertainment is a Kansas-based theater chain that holds the title of the world’s largest. AMC has consistently outperformed its competitors in terms of market share within the United States.

AMC, like many other movie theaters, faced significant financial challenges due to the pandemic in 2020. However, the meme stock phenomenon caused a price surge beyond its financial performance.

By capitalizing on its high stock price, AMC was able to issue shares and secure the necessary funds to weather the pandemic. 

This strategic move ensured the company’s survival, mitigating the dilution experienced by existing shareholders. Had AMC filed for bankruptcy, its shares would have been worthless.

In July 2021, AMC sought permission to increase its share count but withdrew the proposal because of shareholder objections. 

The company acknowledged that issuing more shares would further dilute existing shareholders. It indicates a potential misalignment between management and owners’ interests.

In March 2022, AMC invested in Hycroft Mining Holding, a small gold miner unrelated to its movie theater business. The decision to invest in a risky gold company raised concerns among investors about the management’s allocation of funds.

AMC’s Fundamentals

On May 5, AMC released their Q1 results for the year 2023.

AMC exceeded expectations in Q1 with adjusted EPS beating estimates by 3 cents. The company also achieved revenue of $954.4 million, surpassing analysts’ estimates by $16.20 million and showing a 21.5% YoY growth.

AMC’s standout in the earnings report was its food and beverage revenue, which saw a 30% year-over-year growth. The company achieved consecutive quarter-over-quarter growth in EBITDA.

AMC’s Q1 EBITDA rose by $69 million to reach $7 million, a significant improvement compared to the $62 million loss in the same period last year. Following the earnings announcement on May 5, AMC shares experienced a pre-market trading surge of approximately 4%.

AMC’s Q1 revenue benefited from increased movie releases. In Q1 2023, 35 films grossed over $5 million domestically, a 34% YoY increase. 

This marks the best first-quarter box-office performance since the start of the pandemic. It is 72% of Q1 2019 levels, a notable improvement from last year’s 50% figure.

AMC’s Improvement Against Cash Burn

AMC stock’s current valuations may seem unreasonable to analysts and investors because of the company’s limited positive non-GAAP EBITDA. However, other factors beyond financial performance could drive AMC stock’s upward movement.

Despite the growth in box-office returns, AMC still faces challenges as it has not yet reached pre-pandemic levels. 

However, the company’s risk of bankruptcy is low thanks to its strong liquidity of $704 million, which includes cash, cash equivalents, and un-drawn credit facilities.

AMC’s cash burn showed improvement in the last quarter, with operating expenses totaling around $190 million, down from $224 million in the previous year. 

The company successfully reduced its interest-bearing debt by $208.5 million during Q1 2023. This achievement was facilitated by the issuance of AMC Preferred Equity worth $155.4 million in the same quarter.

Bottom Line

AMC’s current net financial debt position is unexpectedly lower by $440 million compared to its pre-pandemic level in late 2019. 

This shows that the potential share dilution is a risk worth taking for AMC. Given its track record of successfully raising cash through similar actions in recent years, it’s worth the risk.

The potential short-term APE conversion appears highly optimistic for AMC. Given the elevated borrow rates and FTDs, any volatility that drives upward momentum could trigger a short squeeze. With AMC’s YTD gain of almost 30%, some short sellers may be less inclined to endure further losses.

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 InvestorPlace.com Publishing Guidelines.