In February 2021, I dropped my target price of $5 per AMC Entertainment (NYSE:AMC) and encouraged investors to “Stop worrying and love the bubble.”
“Bubbles are terrible for society… [but] recognize the  bubble for what it is: a market speculation game. Investors can expect cheap, fringe companies to continue to outperform before an eventual blowout..”
AMC stock would eventually rise from $3.50 to $60 that year on a pre-diluted basis (or $40 on a diluted basis)…
…and then collapsed as expected.
However, as the months went by, I began to see AMC as plus than a “cheap, marginal” waste. AMC CEO Adam Aron would use the company’s meme-driven stock price to raise capital and pay down debt, undoing some of the financial damage inflicted by his predecessors. And instead of shying away from Reddit fans, the Harvard Business School-educated makeover artist would lean on his ability to Connect with meme investors. and drive the company forward.
Today, AMC has nearly $1 billion in cash, enough to see the company through the next two years. And with Regal Cinemas’ parent company Cineworld on the verge of bankruptcy, AMC could soon become the only national chain left standing.
That should make Wall Street professionals ask:
Were AMC Stock Meme Investors Right??
The consolidation of AMC shares arrives
In mid-August, I described how I made 300% in the stock market without really trying. By concentrating on companies in consolidating industries like airlines and munitions, I would multiply by 3… 5 times… even 10 times the money I was managing for clients at the time.
That’s because consolidating industries eventually become oligopolies, as anyone who needs anything from last-minute airline tickets to shotgun shells will know. delta airlines (NYSE:DAL) now operates more than 80% of flights out of Atlanta’s Hartsfield-Jackson airport, giving it rental-seeking power that’s hard to dislodge. Y outdoor view (NYSE:VSTO) operates a virtual duopoly with Olin (NYSE:OLN); rounds now easily cost $1 or more.
Today, Covid-19 restrictions may have created a similar story in US theaters. Regal, Cinemark, Cineplex Entertainment (OTCMKTS:CPXGF) Y marcus theaters (NYSE:MCS) have economic difficulties; Thomson Reuters models show all four in the bottom 10% of US companies for credit risk. And the Alamo Drafthouse, an upscale upstart serving cocktails and full meals, has already filed for bankruptcy.
Apparently, no amount of “Clooney Margarita Cocktails” could save Drafthouse from creditors..
Many of AMC’s struggling competitors will eventually be gone forever. Cinemark and Cineplex are essentially zombie companies, companies that can barely cover interest payments, let alone principal. And with the former facing bankruptcy, it’s only a matter of time before creditors start liquidating even the stuff nailed to the ground.
That leaves AMC Entertainment as one of the few theaters that could survive the crisis.
It’s a lot like the consolidation of the airline industry in 2012 again..
The economics of cinemas
In 2021, AMC made nearly half of its operating profit from concession sales — the popcorn and drinks sold to hungry moviegoers. Without these profits, AMC would have lost about 30 cents on every dollar of tickets sold.
Essentially, the theater industry is a lot like food stalls with a movie theater in the back..
A key reason is the high concentration of Hollywood studios. In 2021, 17 of the top 20 blockbusters were distributed by just four companies: Walt Disney, Sony (NYSE:Sony), Universal (NYSE:UVV) Y Warner Bros (NASDAQ:WBD).
The result is your run-of-the-mill oligopoly. In 2017, Disney (NYSE:DIS) even took the unprecedented step of asking for up to 70% of theater revenue for its latest Star Wars film, nearly double the 40% cut faced by international movie chains.
As a movie theater, there is little you can do.
But a series of theater bankruptcies could change that in an instant. And if AMC were somehow able to acquire Regal and Cinemark, almost 50% of American screens would suddenly be controlled by a single company. In theory, the newly combined firm could boycott movies and force down rates.
And even if mergers are off the table, a reduction in the studio take rate to 40%-50% would increase the cinema’s gross profits by as much as a third. The industry could go from a turkey to a potential swan within several years.
Don’t pass the popcorn yet…
Of course, no review would be complete without a comprehensive list of concerns.
First, AMC’s stock remains speculative at best. CEO Adam Aron has essentially run out of new shares that he can issue, hence the creation of APE preferred stock. (Spider-Man’s NFTs can only go so far in raising capital.) And despite Mr. Aron’s best efforts, his debt-ridden company still has another $5.5 billion of debt to pay off. 2026 unsecured debt trades for as little as 60 cents on the dollar.
Second, AMC’s APE shares create a new headache for the company’s common shareholders. In theory, APE shares could one day become AMC shares, putting pressure on AMC’s common stock. Long-short strategies will want to sell the higher-priced AMC stock to buy APE in a high-risk bet on an eventual conversion.
Third, keeping both Wall Street and meme investors engaged will require a Herculean effort on Aron’s part. The company’s $28 million investment in a gold mining company has already alienated institutional investors in an attempt to please retailers. And selling more NFTs to moviegoers will eventually do the opposite. (It’s worth remembering that AMC’s public market capitalization is about the same size as its long-term debt, so Mr. Aron can’t ignore either side.)
And finally, movie studios can still put pressure on an established theater industry. Disney and by Paramount (NASDAQ:PARACA) streaming services could undercut theaters or bypass them altogether. Why pay $15 for a movie ticket when it premieres online simultaneously? And if a well-capitalized film distributor like Apple (NASDAQ:AAPL) either Amazon (NASDAQ:AMZN) swoops in to buy Regal, its ability to take losses could give new meaning to the term “nonprofit.”
Still, consolidating industries have a habit of surviving…and even thriving…as the number of competitors shrinks. And if APE’s stock fundraising could help AMC overcome its competitors’ bankruptcies, Adam Aron would have earned his place in the CEO hall of fame.
Should Investors Buy AMC Stock?
Consolidating industries can take years to bear fruit. Delta Airlines merged with Northwest in 2008… But investors had to wait another four years for United and American Airlines to finally consolidate the industry and send DAL shares from $8 to $50.
Likewise, the American film industry will not become a goose that lays the golden eggs overnight. Bankruptcy cases can last for months, and liquidating bankrupt theaters takes even longer. Regal’s creditors won’t give up prized theater locations so easily.
That means investors should avoid short-term AMC options at all costs. The implied volatility of meme stocks is typically around 150, making call options prohibitively expensive. Speculative-minded investors will likely suffer death by a thousand cuts, which is known to option traders as theta decay, or “a normal day of trading” per Reddit’s r/WallStreetBets.
However, historical data tells us that stocks like AMC tend to outperform over the long term. The theater chain is trading at a relatively low 1x forward selling price (P/S): 30% less than the meme rival gamestop (NYSE:GME). On average, these low P/S companies can outperform by up to 5% per year if you’re patient enough to stick around.
But if you want to join in the fun of the meme craze, buying several shares of AMC isn’t the worst idea in the world. (Can’t get any worse than a third Clooney Margarita Cocktail.) Because if meme investors have their way, AMC Entertainment could one day become the last theater chain standing.
Greetings to the King of the Apes.
Tom Yeung is a Market Analyst and Portfolio Manager at Omnia Portfolio, the top-tier subscription on InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-newsletter on how to invest for profits in good times and protect profits during bad times.