As reopening trades go, I think AMC (NYSE: AMC) stock is one of the most exciting. Although that doesn’t mean it’s the best.
Shares in the company have surged in value over the past six months as investors on Reddit and elsewhere have rushed to buy.
This has created an interesting situation. The world’s largest cinema operator has been able to ride this enthusiasm to issue more shares, raising $1.6bn in new capital.
As a result, the risk profile of AMC stock has drastically changed. The company has increased its cash balance and reduced borrowing, even though it’s been operating under severe pandemic restrictions.
Raising cash
In theory, if the company continues to issue new shares, it could eliminate its debt. This would reduce interest costs to zero and could make the enterprise profitable.
Unfortunately, it doesn’t look as if this is going to happen. In April, management put forward a proposal to issue an additional 500m shares but had to backtrack on this. Still, there are plans in the works to issue a further 25m shares, providing a potential cash infusion of $1.4bn.
If this plan comes to fruition, I’d buy AMC stock as a speculative investment and recovery play. Compared to its UK peer, Cineworld, the company seems to have a good deal more support from its investors and more flexibility in raising additional capital.
That’s not to say this business is out of the woods just yet. Revenues are likely to remain depressed for some time. What’s more, it can’t go on issuing new stock forever. For every new share that’s issued, it reduces existing shareholders’ claims on the business.
Therefore, in theory, each share is then worth less. If the company continues to issue new shares, the value of AMC stock may decline.
AMC stock bucks the trend
Still, this is just theory. It’s impossible to predict the direction of share prices. The company has bucked the trend and defied critics, so far, and that could continue.
This is why I’d buy AMC stock. The company has continued to prove its critics wrong and made the most of a bad situation over the past 12 months.
As the global economy continues to recover from the coronavirus pandemic, the corporation’s revenues should increase. And as revenues grow, the company’s improving fundamentals may help drive the share price higher.
Of course, if the recovery starts to stutter, the opposite could happen. This is probably the most considerable risk and challenge hanging over the enterprise right now, and it’s the reason why I rate the business as a speculative buy.
AMC stock has potential, but it’s not suitable for the faint-hearted. The group’s recovery could fall apart at a moment’s notice.
