AMC Entertainment Selling Up To 11.6 Million Shares After Skyrocketing 2,900%, But Warns Investors Could Lose It All - Forbes

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Topline

After a massive run-up in its stock price, AMC Entertainment announced Thursday morning it's looking to raise additional cash by selling as many as 11.6 million shares in an offering, but the firm, which has recently embraced its emphatic and largely Reddit-based individual investors, also cautioned against the investment unless buyers are prepared to—at worst—lose it all.

Key Facts

AMC, the world’s largest movie theater chain, has enlisted Citigroup and B. Riley Securities to help it raise as much as $722 million based on Wednesday’s closing prices, according to a new filing.

Update: Early Thursday afternoon, AMC announced it had successfully completed the offering, raising $587.4 million in new capital by selling shares at an average price of $50.85; the stock briefly recouped losses afterward, but ended the day down 20% to $51.54.

The firm says it will use the net proceeds to pay back part of its massive debt load (more than $5 billion), acquire new theater assets (something CEO Adam Aron teased Wednesday) and fund “other investments.”

In the filing, however, the company also cautioned against the investment, saying that “under the circumstances,” people should only buy into the stock if they are “prepared to incur the risk of losing all or a substantial portion” of their investment.

The company cited a glut in short interest, access to margin debt, options trading and the bullish sentiment among retail investors as reasons for current trading prices before warning that gains driven by a short squeeze would be “inflated” until short positions abate—something that caused a crash among so-called meme stocks in late January.

Crucial Quote

“Our market capitalization, as implied by various trading prices, currently reflects valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization immediately prior to the Covid-19 pandemic,” AMC said Thursday while announcing the new stock sale.

Chief Critic

“Although we have seen some exiting of positions throughout the year, the majority of short-sellers have been happy to sit on significant paper losses in the hope that retail investors will blink first and the losses won’t be [realized],” Ortex analysts wrote in a Wednesday note. “This now looks like a flawed strategy.” Short-sellers betting against AMC lost an estimated $2.8 billion on Wednesday alone, according to Ortex.

Surprising Fact

AMC shares surged 96% Tuesday, pushing gains to nearly 2,900% this year.

Key Background

The recent rise in AMC and other meme stocks follows a similar surge in January, when activist investors perched on Reddit's r/WallStreetBets board pumped struggling firms like AMC, GameStop and BlackBerry in a bid to hurt short-sellers—fueling what's known as a short squeeze. “There’s a certain vigilante mindset amongst those traders being drawn into this social-media frenzy to pump certain stocks,” Nigel Green, the CEO of $12 billion advisory Devere Group, said in an email last week, adding that “extreme caution should be exercised before joining stock frenzies of such nature.” Meme stocks have been incredibly volatile this year, with most crashing in late January once institutional investors piled out of their short bets after weeks of meteoric gains. Thus far, only AMC, which has also benefited from broader optimism over businesses reopening, has recouped those losses.