No, AMC’s price action is not normal. In under a week the cinema operator has risen five-fold. In fact, this may seem like deja vu, something very similar happened in January too. AMC is not some illiquid micro-cap, its valuation is currently in the tens of billions.

This may feel like the meme stocks episode from January all over again, the hedge funds and retail investors forming positions around wild price fluctuations. However, this time something really may be different. This time AMC is prepared for the volatility. It is taking advantage of it. They sold shares and increased their cash pile.

Share Sale

AMC has raised $1.2 billion dollars from selling shares this quarter, half of that was announced today after the run-up in the shares, another few hundred million was raised on Monday.

Circularity

This creates some circularity to the valuation of AMC. It’s a bit like the error you get in an Excel when two cells are trying to base their values of each other at the same time.

The challenge is this. Normally, the ups and downs of a company’s stock don’t matter too much for operating performance. Whether the shares are at $10 or at $50, most company’s day-to-day profits are not changed by the share price itself. The company keeps making widgets and serving customers and the share price doesn’t matter. That same logic doesn’t necessarily apply to AMC given the actions they have taken this quarter.

Cash Burn

For the first three months of 2021, AMC burned through around $300 million in cash. With just over $800 million in cash left on the balance sheet in March and a lot of debt, that situation looked somewhat precarious to a pessimist. If audiences didn’t improve materially before late 2021, the cash may run out. That’s never a good scenario as an equity investor.

Doubling The Cash Pile

The run up in the shares may have changed that calculus. The company may have more than doubled its cash pile from selling shares since March.

Now of course, you can debate the merits of AMC as an investment, but precisely because of the run-up in the shares and the associated issuance at these relatively high prices, the company now has a lot more cash than it did before. AMC’s financial future appears a lot more robust than it was at the end of March, but not because of operational changes, because of selling shares. Again, that’s not to say that the current valuation necessarily makes sense, but the company’s financial future feels a lot more certain.

No Free Lunch

Of course, it’s not a free lunch. That cash infusion has come with a increase in the number of shares the company has outstanding. Now each shareholder gets a slightly smaller piece of the more cash rich AMC pie. Still, now perhaps that pie is bigger because AMC’s future is a little more secure, with a much larger cash pile. That may work out to be a positive trade-off for shareholders.

Back in January, valuation swings in the like of GameStop GME and AMC were interesting to watch and sources of profit and loss for many investors. Now, these moves have potentially deeper implications.

Buy selling shares as prices spike, the companies themselves are actually changing and potentially improving their fortunes because of these spikes, even if don’t last. It seems highly unlikely that this financial engineering alone actual justifies all the rapid increase in value, but maybe it accounts for a portion of it.

Circular Share Prices

Normally, swings in the prices of shares shouldn’t matter for the operational performance of a company. However, for AMC the higher share price and associated equity issuance may have improved their financial position. Hence, to some degree, perhaps a higher stock price has caused AMC to be worth more for the long-term. That’s unusual. However, given the strategy potentially works, we might expect to see more of it, if this sort of volatility persists.