Investors should now be familiar with the story behind so-called “meme stocks.” These are companies considered not that great by hedge funds and savvy investors who bought into the technology sector, so they naturally carry large short interest due to the number of short sellers who take on their bearish views. What ends up happening is a management stunt to send the stock rallying and cause what’s known as a short squeeze, otherwise known as an astronomic rally.

The latest example of this sequence is the GameStop Corp. (NYSE: GME) saga, where the stock more than tripled in price due to a Twitter (now X) user posting his bullish thesis on the stock, and that was enough to trigger a wave of retail investor buying to spark a short squeeze. Following suit, today, investors face another halt in trading due to a sudden upside move in shares of AMC Entertainment Holdings Inc. (NYSE: AMC), as a new announcement from management sent the stock rallying by more than 10.9%.

As the stock was halted until investors may want to check in to see what is happening behind the scenes to make a better-educated guess about the stock’s direction. It all starts with what the announcement implies: a debt restructuring that might help the company buy some time and get its house in order.

The Deal Terms Boosting AMC Stock's Rally

Some investors may recall a similar strategy used by Carvana Co. (NYSE: CVNA) management when it swapped some of its long-term bond obligations for convertible bonds. This allowed creditors to unburden the company, let its operations thrive, and enjoy better upside through equity ownership.

AMC management took a page out of the Carvana playbook recently, as SEC filings show the transaction deal specifies that up to $2.45 billion in debt maturities will be extended from their current maturity of 2026 to 2029, allowing for more breathing room for the stock to maneuver past the nearing maturities calling for available cash on hand to repay.

In addition, the company has invested up to $464 million in convertible bonds. These bonds not only reduce the company's debt burden but also allow creditors to convert their debt into shares and enjoy the upside (if any) of the company's future.

Once Carvana issued the same strategy behind convertible bonds, markets were accepting enough to stampede into the stock and bring it to a nearly six-fold rally in the 12 months that followed. Far from assuming that history will repeat itself, investors can look deeper into the company's financials to either justify or dismantle the prospects of a continued rally.

AMC Stock: Financial Drivers Investors Can't Ignore

When investors examine the company's latest quarterly earnings, slightly flat annual revenues are the most minor threat to this potentially short-lived rally. AMC reported yet another quarter of net losses, with $163.5 million lost this quarter, compared to a net loss of $235.5 million a year prior.

But it doesn't stop there. Savvy investors will ask about cash flows since net income is easily manipulated through "creative accounting." Operating cash flows were nonexistent, as AMC reported a net outflow of $188.3 million this quarter, compared to $189.9 million a year prior.

Investors can land on free cash flow measures by taking out the needed capital expenditures to keep the business running and movies showing. This quarter's negative free cash flow of $238.8 million, compared to $237.3 million a year prior, shows worsening conditions in the underlying business operations.https://www.marketbeat.com/originals/amc-entertainment-time-to-take-step-back-into-this-meme-stock/

The question is, how does AMC keep running if it doesn't make any money? The answer is dilution since nobody is readily looking to buy its debt. Last time there was a meme stock run, AMC management took advantage of the high stock price to issue expensive stock into the market and fund its ongoing operations.

While buying up to three more years in the timeline that AMC faces before it needs to pay up for its bonds can be a good thing, investors who now have the option to convert their bonds into stock need to have a very good reason for doing so. Without any earnings or free cash flow to show, converting might not even be a consideration for most.

Even with the new restructuring, Wall Street analysts know better than to expect a short squeeze or a similar run to Carvana stock when it applied the same strategy, as that company at least had a plan – and path – to achieve free cash flow.

Citigroup analysts still see a price target of $3.2 for AMC stock, calling for an up to 40% downside from where the stock has rallied today. Even more recent analyst ratings: As of July 2024, Macquarie analysts see only a $4 valuation on AMC stock, still expecting a 24.5% downside from today's prices.