Stocks to sell

Red Alert! This Is the Beginning of the End for AMC Stock.

Is the era of meme-stock rallies finally over? Probably not, but we may be witnessing a last gasp as AMC Entertainment (NYSE:AMC) stock tumbles to alarming lows. As long as AMC Entertainment is willing to dilute its current shares through common stock offerings and conversions, even the faithful “Apes” should consider cutting their losses and moving on.

Of course, by “Apes” I mean the loyal followers of AMC Entertainment and its celebrity CEO, Adam Aron. He’s understandably proud of the blockbuster films that AMC Entertainment has featured lately. Nevertheless, as AMC resorts to dilutive measures to manage its debt load, there’s a trust issue that any eager meme-ster ought to consider.

AMC Entertainment’s Blonde Ambition

Can two famous blondes save AMC Entertainment from financial ruin? First, Aron touted the Barbie movie as a reason for AMC’s “explosive start” to the current quarter. Then, more recently, Aron boasted about the “[g]reat seats available” (as if this were an actual concert and not just a movie) to the Taylor Swift concert film.

I won’t deny that the Taylor Swift movie is doing well, but that’s not the point here. Occasional blockbusters will bring in millions of dollars in gross proceeds. Subtract the costs of these revenues, and you’ve got the net proceeds, which likely won’t come anywhere near AMC’s roughly $9.5 billion worth of short- and long-term debt.

AMC Entertainment will continue to pay the interest on that debt. Will big cinematic hits keep on coming? The Apes and meme-stock traders might count on one miracle happening after another, but sensible investors shouldn’t.

Why AMC Stock Crashed and Burned

From July 20 to Sept. 8, AMC stock plummeted from $58.50 to just $7 and change. The market, it seems, is finally acknowledging that this stock, and meme stocks generally, never should have gone so high in the first place.

Maybe I’m reading too much into this event, so let’s delve into the specific reason that financial traders dumped their AMC shares. First, a Delaware court judge approved the company’s plan to convert some of its AMC Preferred Equity Units (NYSE:APE) into AMC Entertainment common shares. That sounds like a win, right?

Not really. Soon after the judge’s ruling, AMC Entertainment disclosed its intention to sell as many as 40 million common stock shares. At least some of the proceeds will be used to service AMC’s “existing indebtedness.”

InvestorPlace contributor Chris MacDonald provided the eye-watering details of how AMC Entertainment enacted a 1-for-10 reverse stock split and a massive APE-to-AMC share conversion. By MacDonald’s calculations, “Converting 995.4 million APE shares as of June 30 into AMC stock will result in the issuance of 99.54 million APE shares.”

Just let that sink in for a moment, and consider AMC Entertainment’s unabashed willingness to dilute its current common shares. After all of that, I would only expect AMC’s shareholders to have major trust issues with the company.

AMC Stock: The Meme Movement’s Swan Song

At this point, I can’t blame some analysts for expecting AMC Entertainment to continue diluting the value of its shares. Hopefully, overeager traders will learn a few lessons as AMC shares rapidly lose value.

Moreover, as the meme music finally fades and reality sets in, it’s time for the Apes to move on with their lives. AMC’s shareholders should be “prepared to incur the risk of losing all or a substantial portion” of their investment.” That’s a quote from AMC Entertainment, not one of its critics.

MacDonald predicted that “AMC is headed to zero.” However, I’m not prepared to go that far. Occasional blockbuster films should keep AMC Entertainment afloat for the foreseeable future.

Yet, being “afloat” isn’t the same thing as managing AMC Entertainment’s considerable debt burden. AMC stock, and the meme-stock movement as a whole, got ahead of itself two years ago. Now it’s collapsing, and it’s time to move on put the memes where they belong: in the history books.

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.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.