It’s a good time to be an AMC investor. Or, depending on what you read, it may soon be a very bad time.
This past week, AMC has seen its stock jump tenfold as retail investors (those are the everyday people who buy shares of a company on an app like Robinhood instead of financial institutions) jumped to buy a flood of stock made available by an investment firm. Here’s the tl;dr: A firm called Mudrick Capital bought 8.5 million AMC shares valued at about $230 million. Mudrick Capital then turned around and immediately sold those shares back to the retail investors who were clamoring for a bigger piece of AMC after a successful long weekend for movies like A Quiet Place Part II and Cruella.
By the end of Wednesday, hundreds of millions of shares were exchanged and AMC stock was halted several times due to wild activity. The power of Reddit. It’s a beautiful and terrifying thing. Ironically, if Mudrick had waited one more day, the firm would have made hundreds of millions of dollars more.
Capitalizing on the movement, AMC sold even more stock to those same hungry retail investors just two days later. Now there’s a question about whether or not AMC will start to run low on available shares to sell. Finance!
Folks who remember GameStop’s stock mania in January and February will see similar patterns. But unlike GameStop, which never really leaned into the online circus of it all, AMC is diving head first into this new batch of shareholders. CEO Adam Aron is tweeting more (to connect with his new owners), appearing on YouTube shows (to connect with his new owners), and donating to a gorilla preservation wildlife fund (to connect with his new owners, who embraced the specific animal because of an ape meme).
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It’s all fun and games — until the speculative market comes crashing down. The question is will that happen? While GameStop’s financial rollercoaster was more in line with people buying and dumping shares because they wanted to participate in the “meme stock,” AMC’s buyers seem more convinced that AMC is going to have a massive resurgence. They seem to believe, as reports in the Wall Street Journal and Bloomberg have pointed out, that AMC can become a giant once again.
Trying to understand where AMC exists as a business beyond startling figures and beyond the memes, is key. Was AMC a stable business before the pandemic? Are AMC’s biggest threats — streaming — still present? Look, it’s a complicated issue that the best minds in finance and entertainment are trying to understand. We’re not going to figure out if it’s a “good” or a “bad” buy by the end of this column, but we are going to understand AMC’s foundation a little more.
There are three components to think about:
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Theater attendance over the last 30 years
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AMC’s growing competition in the streaming space
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Potential profit versus the debt its carrying
Theater Attendance Is Down Even if Ticket Sales Are Up
I should preface this by saying that I don’t think theaters are dying out, nor do I think this is a story that ends with an entire industry saying goodbye to cinemas. At all. I like theaters — a lot.
That said, there are some metrics that are impossible to ignore. Theater attendance per capita hit the lowest point in nearly 100 years, as Bloomberg reported in 2019. Theatergoers actually went to the movies on average about three-and-a-half times in 2019, the article added. This makes it the lowest on average attendance since 2002. And that was before the pandemic hit.
Now, while theatrical attendance was down on average, revenue from ticket sales has steadily climbed. Experts chalk this up to the type of movie people are going to see.
With Netflix, Disney+, HBO Max, Peacock, Paramount+, Discovery+, Apple TV+, Amazon Prime Video, Hulu, and about a few other dozen streaming services — not to mention TikTok, YouTube, or Fortnite — there are more options to be entertained at home. They also tend to be cheaper (sometimes downright free) and, as Walt Disney Studios chief creative officer Alan Horn told the Hollywood Reporter in February 2020, people aren’t dealing with a sick person on their right and someone texting on their left.
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If people are leaving their house to watch a movie, meaning they’re taking a 25-minute subway ride or sitting in traffic for half an hour and paying $100 to see something with their family, the movie better be worth it. These tend to be massive blockbusters that belong to a franchise series they already know and love. The return on their investment (that $100) is likely going to be pretty good. Avengers: Endgame, Star Wars: The Rise of Skywalker, Fate of the Furious…you get the picture.
The good news is that 2021’s latter half is full of exactly these types of movies. Shang-Chi and the Legend of the Ten Rings, Venom: Let There Be Carnage, No Time to Die, Ghostbusters: Afterlife, Top Gun: Maverick, Spider-Man: No Way Home, West Side Story, and The Matrix 4 are all due out this year. For AMC investors who may wholeheartedly believe that people will return to theaters in droves, it’s a good sign. These are the types of movies people want to see, according to data.
One of the bigger issues that bears (an investor term used to describe someone who doesn’t believe a company can succeed) often bring up is that AMC can’t just return to average pre-pandemic business norms. Those weren’t exactly great. Prior to AMC’s stock mania, the company was just staving off bankruptcy, collecting billions in debt, closing theaters and laying off employees.
AMC’s current enterprise value is more than $40 billion. A few days ago, it was $15.6 billion. At the end of 2019, it was $5.8 billion. That’s a massive increase in valuation despite AMC having the worst year on record in 2020. This means the stock could be overvalued, which could drastically impact investors — those same investors buying into AMC, whether because they believe in the power of movie theaters or because they simply love a good meme. That’s not just analysts saying it, either; it’s AMC.
“And to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our Class A common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations,” AMC executives noted in public documents on Tuesday.
Or, simply put, because the stock being bought isn’t reflective of the company’s actual financial reality, if AMC returns to its previous value, shareholders could lose out on a lot of money. Key word: could. It’s mostly reliant on consumer behavior, a term that companies like Disney warned shareholders at the beginning of the pandemic was something they couldn’t predict.
Considering that AMC is a business reliant on movies (it doesn’t even own all the land its theaters are built on) the only thing that prevents this from happening is people returning in droves.
Studios Are Friends and Competitors
Good news: Studios need theaters. Bad news: Studios don’t need theaters as much.
The majority of theaters revenue comes from four studios: Disney (now with Fox under its wing), Warner Bros. (now part of a new combined company with Discovery), Universal, and Sony. Paramount and Lionsgate have some market share globally, but it’s really those aforementioned four.
As part of Disney’s strategy, the company is moving some 20th Century and Searchlight Pictures movies to Hulu. Other Disney live-action films that may have gone to theaters will likely move to Disney+ as part of Premier Access. Warner Bros. is releasing its 2021 films on HBO Max and in theaters on the same day. Universal is moving some of its 2021 movies, including Boss Baby 2, to Peacock for people to stream at home at no extra cost. Sony is partnering with Netflix to produce some exclusive titles for the streaming service.
Ironically, Netflix is trying to get into theaters. Kind of.
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Let’s look at the numbers. In 2019, Disney (with Fox) controlled more than 50% of the global box office. That was followed by Warner Bros. with just over 16% of the box office, Universal with just over 12%, and Sony with just over 11%. Thinking of how the theatrical attendance has operated over the last 30 years, it’s not necessarily an issue if Disney moves some of its non-blockbusters to Disney+ or Hulu, but the company is still removing titles from theatrical distribution because it has a streaming service — or two — to feed.
Streaming is a competitor for AMC due to the restricting of windows (a term used in the industry to simply mean how long a movie plays in a theater) that it is in part causing. Arguably, home video has been a competitor for decades, but whereas studios used to relegate “C-tier” movies to straight DVD releases, the quality of a movie on a streaming service has vastly improved over the last six years. When it was just Netflix, AMC had a leg to stand on. When it’s nearly every studio whose movies drive people to theaters, that leg disappears. It’s why CEO Adam Aron had to cut new deals with studios who wanted to remove their films from AMC theaters after 45 days, or half of the typical exclusivity window.
“When we couldn’t strike deals with studios on shorter windows, we resisted them with all of our might,” Aron said on a recent earnings call, before the batch of new announcements about shorter windows started being released. “This is an area I feel very good about.”
Everything comes back to this idea that AMC can’t just do as well as it did (which wasn’t superb) pre-pandemic. It has to do better. That’s harder when studios that belong to companies with streaming services are prioritizing those, too. Let’s pose the question this way: If AMC and Disney couldn’t figure out how to work together, who would suffer more?
Disney could still find ways to distribute its movies in key territories like China while making big blockbusters available exclusively via Disney+ for $40, a $10 increase in Premier Access but still profitable considering the split Disney takes (anywhere from 70 to 100% depending on if distributors like Apple and Amazon take a cut of someone watching Cruella on Disney+ at home through Apple TV or Amazon Fire TV). This is the most extreme example, though. Disney maintains one of the best positions in the market, and Disney wants to be in theaters around the world. And streaming leads to easier, high-resolution piracy.
There’s no obvious reason for Disney to walk away from AMC, and Disney isn’t about to give up its box office reign, but the above example is just to showcase how power dynamics can shift. So why would retail investors want in on AMC? If we examine GameStop, when retail investors became mass shareholders in the company it was able to “overhaul its management team and raise money to invest in modernizing its business, potentially giving it new life,” according to CNBC. GameStop was also able to get rid of long-term debt, CNBC added, noting that this is something AMC will still face in the years to come.
AMC shareholders now have quite a bit of power — and the CEO’s ear. They believe in the experience of people going to theaters, and they believe that as case numbers continue to drop and vaccination rates either increase or hold steady, one of the first things consumers will do is visit theaters once again. Apes, as they refer to themselves, are all in on the potential of it all.
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Let’s Talk About Profit vs Debt
More importantly, there’s a belief among Wall Street analysts that retail investors can modernize AMC’s business, according to CNBC. It becomes less about competing with Disney or Warner Bros. and determining how everyone can work together within the new ecosystem — something Aron has talked about on other earnings calls.
Maybe if shareholders and management can figure that out, and maybe if the desire to go back to movies in the near and long term is enough to stave off concerns from disbelievers, there’s a chance that AMC lives up to the new stock market hype — but the overarching, big question is will this happen in the time that it needs to happen?
The more that retail investors and redditors drive up AMC’s stock, the more AMC can capitalize on that manic interest and continue to raise funds, as CNBC points out. Can Reddit and the internet at large continue to do that through 2023, when Aron told analysts he’s expecting AMC to become profitable again? Can AMC and its army of investors pull off a Hertz?
Current numbers help explain why many analysts — including the handful who cover AMC — aren’t as optimistic as the Reddit bulls. Aside from the billions of dollars in debt the company took on over the last few years alone, box office numbers dropped about 80% between 2018 and 2020. The former brought in $11.9 billion in the US, while the latter saw a low of $2.1 billion. Obviously, part of this is the pandemic, which retail investors will point to as the “well, d’uh” moment of it all.
As AMC attempts to go on the offense and acquire more small theater chains and effectively pop up over the United States like little red houses on a Monopoly board, there are also concerns that any attempt to monopolize the market may not come to fruition because of true competition in the space. Regal and Cinemark still exist. They’re probably unlikely to sell to AMC, even as the company sells more shares to raise its initial capital to acquire as much as possible.
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What retail investors seem to be betting on is potential. Barron’s lays it out nicely: If AMC can continue to increase its market share and the U.S. box office does return to 2018 levels, “total sales might be at $9 billion—$6 billion from tickets and $3 billion from concessions. Sales in 2018 amounted to $5.5 billion.” That’s step one. If all this happens, and AMC has better gross profit margins (a phrase that simply refers to the financial health of a company, and how good said business is at managing its operations), AMC could generate “$600 million in free cash flow annually.”
As it currently stands, analysts believe that 2023 will see AMC achieve free cash flow, according to Barron’s — but $90 million, not $600 million.
Right now, AMC has to find cold, hard revenue and cash to justify its wild valuation. Redditors and retail investors are hoping this could happen — or maybe they’re hoping the stock price will keep going up enough for them to eventually cash in and walk away, just like the institutional investors before them.
What’s apparent is how manic the entire situation is. No one really knows what’s going to happen next. AMC could make a resounding comeback. AMC could become a piece of gold for many investors. AMC could welcome in the resurgence of movies going at wildly high levels — remember that Regal went bankrupt in 2002, just before tentpole blockbuster movies really started finding their stride.
But there’s a good chance that all of this fails, and that’s what’s truly terrifying. Again, that’s not just analysts saying it — it’s AMC, too.