Don’t Ape the Apes by Overleveraging on AMC Entertainment Stock

Global movie-theater chain AMC Entertainment (NYSE:AMC) stock made the financial headlines recently when it announced plans to issue a special dividend in the form of preferred equity units. This has some of the company’s fans, or “apes,” excited. However, investors should be careful as the movie-theater chain is still unprofitable.

If you’re active in financial social media, you’ve probably heard about the apes. They steadfastly support AMC Entertainment Adam Aron and his company. Some of the apes are active on Reddit, where traders may be able to get the inside scoop on short squeezes.

Just about any news item can be the spark that sets off a massive short squeeze. In the case of AMC Entertainment, the company’s issuance of a news equity unit type with its own ticker symbol seems to be stirring up interest.

However, before jumping into the trade, take a moment to consider AMC Entertainment’s financial situation. It might be improving in some ways, but it’s far from ideal.

What’s Happening with AMC Stock?

AMC stock went on a tear recently, running from $15 on Aug. 1 to $22 on Aug. 5. During that span of time, AMC Entertainment released its second-quarter 2022 financial data.

Yet, some of the apes apparently cared less about the company’s financials, than the prospect of owning an equity unit with the ticker symbol APE. According to a press release, AMC Entertainment has declared a special dividend of one AMC preferred equity unit for each of the company’s Class A common stock shares.

Furthermore, these APE preferred equity units are to trade on the New York Stock Exchange. They’re “designed to have the same economic and voting rights as one share of Common Stock,” according to the press release.

Of course, AMC chairman and CEO Adam Aron hyped up this event without hesitation.

“This new AMC Preferred Equity gives AMC a currency that can be used in the future to strengthen our balance sheet, including by paying down debt or raising fresh equity,” Aron said. “As a result, this dramatically lessens any near-term survival risk for AMC, as we continue to work our way through this pandemic.”

This, Aron warned any would-be short-sellers, “is not good news for those who may be rooting against AMC.”

Check AMC Entertainment’s Financials Before Buying

In the short term, Aron’s right that the short-sellers will likely experience some pain. A huge move in AMC stock has already taken place, though. So, jumping into the long side of the trade now could be a dangerous proposition.

Issuing shares, whether they’re common or preferred, is a quick and easy way for AMC Entertainment to generate capital.

However, it doesn’t completely fix the company’s problems. One estimate puts AMC Entertainment’s outstanding debt at roughly $5.5 billion.

Meanwhile, AMC Entertainment’s Q2 2022 results were a mixed bag of good news and not-so-good news.

The bulls can point to the company’s revenue growth, from $444.7 million in the second quarter of 2021 to $1.2 billion in 2022’s second quarter. Also, during that same time frame, AMC Entertainment’s net earnings loss narrowed from $334 million to $121.6 million.

Still, the company remains unprofitable and this could be a red flag for cautious investors. Moreover, AMC Entertainment’s -$117 million in free cash flow for Q2 2022 might alarm some traders.

What You Can Do Now

AMC stock surged 19% immediately after the company announced the introduction of the APE preferred equity units. Without a doubt, some apes are celebrating this event.

Still, AMC Entertainment’s financials are far from perfect. Also, the enthusiasm over the new preferred equity units may already be priced into AMC shares.

Frankly, profiting from meme stocks isn’t always as easy as it looks. Therefore, careful traders should consider leaving the gambling to the apes, and keeping their distance from AMC stock.

On the date of publication, David Moadel 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.