What happened

Shares of AMC Entertainment (AMC -2.45%) dropped 47.8% this week, according to data from S&P Global Market Intelligence. The movie theater chain and popular meme stock issued a new class of preferred stock with the ticker APE (APE -7.01%), which is equivalent to one share of the common stock. This is why shares of the original AMC class almost got cut in half in the last few trading days. As of this writing, shares of AMC Entertainment are down 47.8% this week. 

So what

As many of us know by now, AMC turned into a meme stock in 2021. Retail investors bid up the stock to astronomical heights even while the movie theater chain has struggled to generate positive cash flow. To take advantage of this inflated stock price, management has consistently issued a gigantic amount of shares to raise capital. For reference, AMC’s share count went from around 100 million before the pandemic to over 500 million today.

However, with all this share dilution, AMC has hit a ceiling on the number of common shares it can have outstanding. And without approval from its board of directors, it is unable to issue any more. This is where APE preferred stock comes in. Recently, AMC authorized up to 1 billion new preferred units called APE, which is economically equivalent to a share of AMC common stock.

What does all this mean for investors of AMC? Well, you can essentially think of APE as a way to split AMC stock without technically issuing more shares of common stock. This is why shares of AMC fell so much this week, because half of the economic value of the underlying business is now under the APE preferred equity.

Over time, investors should expect the price of both AMC common stock and APE to converge, as they are economically worth the same amount. As of this writing, shares of AMC common stock trade at $9.38 a share, and shares of APE trade at $7.13 a share.

Now what

AMC Free Cash Flow data by YCharts

The AMC and APE share classes are a bit strange and confusing for someone not versed in the financial legal world. But if you were an investor in the company before the stock split, all these little details don’t matter because you still own a piece of the same underlying business.

And right now, movie theaters are struggling mightily to recover from the COVID-19 pandemic. AMC is burning a ton of free cash flow each year. Unless that changes, this stock should be avoided by any fundamental-focused investors.