There is a third side to AMC’s stock story

AMC Entertainment Holdings (NYSE: AMC) was a gymnastics star last year, but it didn’t quite succeed on landing. The stock has lost more than half of its value in the last seven months of the year. However, thanks to a surge in shorts in the first five months of the year, AMC is still the top performing large-cap company in the country for all of 2021. Shares of the country’s top multiplex operator were close. than 13 baggers last year. , and it is with its number of shares which has almost quintupled in the last four quarters.

There are two loud camps when it comes to AMC. The most vocal bulls argue that hedge funds manipulate the decline in stocks through bare shorts and synthetic stocks. Bears argue that movie theaters are on the verge of extinction and that creditors will eventually wipe out today’s shareholders after AMC goes bankrupt.

Much like the stock itself in 2021 – a discovery that shifted wealth to its peak in early June, then a wallet-wrecker in the past seven months – opinions on AMC tend to go to the extreme. . But there is a third camp that does not attract the same kind of media attention as the two polarizing camps. I am in this camp. I see AMC surviving. I just think the stock is overvalued by all historical benchmarks. Maybe you are like me. Now is probably a good time to tell our side of the story.

What bears are missing

The pandemic has been understandably tough on exhibitors, and it’s not like the movie industry is booming before the COVID-19 crisis rocked your local multiplex. Domestic ticket sales peaked in 2002, when nearly 1.6 billion tickets were purchased. We were at 1.2 billion seats sold in 2019, the last full year of operation and benchmark for market recovery. Ticket prices have increased slightly in most years, and in terms of revenue, the peak is quite recent. The industry sold a record $ 11.9 billion admissions in 2018. However, adjusted for inflation, this is 17% below the peak almost two decades earlier.

It might seem like a grim start for a section on What Naysayers Go Wrong, but it’s the scene painting that’s needed to flesh out the environment our protagonist is facing right now. AMC is gaining market share in this climate. He’s carving out a thicker slice of what appears to be a shrinking pie, and there’s little competition to oppose it. You can’t yell “fire” in a once crowded movie theater, but you can yell “fire sell”, and that is exactly what is happening. AMC’s biggest rival has closed its theaters twice during the pandemic, while AMC has only had a few months of downtime. AMC has not only reopened its once closed locations, but is now starting to munch on rival abandoned locations. AMC is emerging as a bigger player, and that comes with scalability and power with Hollywood studios.

The product also becomes more lucrative financially. An obvious example is the concession stand. Ticket sales are a cover charge and these admissions are split between the theater operator and the movie studio. The real profit margins are when people take a jar of popcorn along with other snacks and drinks to wash it all down. People have returned hungry and thirsty to the multiplex, and AMC has made the most of the pandemic lull by expanding its mobile ordering platform, where consumers are spending more than they would and saving time in the process. . Last summer, food and beverage sales at AMC were up 42% per customer compared to two years earlier.

AMC is also pushing people to order movie tickets earlier, shifting more of its sales to reserved seats. Switching to reserved seating was necessary at the start of the pandemic when people needed to be socially distanced, but it also prompts moviegoers to order early to get the best seats. With the decision last month to offer non-fungible tokens (NFTs) to the first pre-orders of Spider-Man: No Path Home, AMC now has a new digital tool to boost early ticket sales. Finally, while he sometimes crosses the line between promoting his business and promoting his stocks, CEO Adam Aron has done a great job of making AMC’s millions of retail investors feel like they have a hand. direct in the survival and ultimate success of the chain. You have to understand when a market leader isn’t complacent, and AMC – along with Aron – isn’t afraid to raise the bar and disrupt their own earlier model.

What the bulls miss

I can keep this section more concise. Even after losing 63% of its stock price in the past seven months, AMC isn’t exactly cheap. With a market capitalization of $ 14 billion and an over-leveraged balance sheet that supports its enterprise value north of $ 23 billion, AMC is trading at optimistic multiples of its income over time and an eventual return to profitability.

It’s also problematic that many of the most followed AMC bulls on social media have razor-sharp success stories making stock calls before the stock market phenomenon meme. You have to start somewhere, but it’s worrying that they’re more inclined to discuss the short selling theories that Aron himself debunked over the summer than to discuss legitimate bullish arguments like the expansion. margins or the positive transformation of AMC itself. It’s almost as if they are focusing more on sensationalism to bolster their influence and monetization opportunities as influencers than they are stepping back to flesh out a discounted cash flow analysis to justify a big price target on the action. The story of individual investors versus hedge funds is fascinating, but – as Spidey himself once said – with great power comes great (fiscal) responsibility.

Challenges await AMC. Gaining market share in a shrinking market doesn’t change the fact that the pie is getting smaller and smaller. Outside of superhero movies, consumers have become fond of home streaming releases, and movie studios are unlikely to revert to the longest theatrical release windows of the past. Analysts see AMC in at least a few years back to profitability. There is a bullish counter on this front – as mobile orders, reserved seats, NFT promotions, and a strong pipeline of 2022 action movies can increase the money-making potential of movie theater stocks – but who has the time to hear both sides of the story these days? I’d like to think this third side of the story is the most reasonable, but good luck being heard when both extremes cry out.