In February 2021, I threw out my $5 target price for 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 game of market speculation. Investors can expect cheap, marginal companies to keep outperforming before an eventual burst.”
AMC stock would eventually rise from $3.50 to $60 that year on a pre-diluted basis (or $40 on a diluted one)…
…and then come crashing down as expected.
As the months passed, however, I began to see AMC as more than a “cheap, marginal” throwaway. AMC’s CEO, Adam Aron, would use the firm’s meme-driven stock price to raise capital and pay down debt, undoing some of the financial damage inflicted by his predecessors. And rather than shy away from adoring Reddit fans, the Harvard Business School-educated turnaround artist would lean into his ability to connect with meme investors and drive the company forward.
Today, AMC sits on almost $1 billion in cash – plenty to tide the firm over for the next two years. And with the parent of Regal Cinemas Cineworld teetering on bankruptcy, AMC could soon become the only national chain left standing.
That should have Wall Street pros asking:
Were meme investors right all along about AMC stock?
Consolidation Comes for AMC Stock
In mid-August, I outlined how I earned 300% in the stock market without really trying. By focusing on companies in consolidating industries like airlines and ammunition, I would 3x… 5x… even 10x the money I was managing for clients at the time.
That’s because consolidating industries eventually turn into oligopolies, as anyone needing anything from last-minute airline tickets to shotgun shells will know. Delta Airlines (NYSE:DAL) now operates over 80% of the flights from Atlanta’s Hartsfield-Jackson airport, giving it rent-seeking power that’s hard to dislodge. And Vista Outdoor (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 U.S. cinemas. Regal, Cinemark, Cineplex Entertainment (OTCMKTS:CPXGF) and Marcus Theaters (NYSE:MCS) are all struggling financially; models from Thomson Reuters show all four in the bottom 10% of U.S. companies by credit risk. And Alamo Drafthouse, a high-end upstart serving cocktails and full meals, has already declared bankruptcy.
Apparently, no amount of “Clooney Margarita Cocktails” could save the Drafthouse from creditors.
Many of AMC’s struggling competitors will eventually disappear for good. Cinemark and Cineplex are essentially zombie companies – firms that can barely cover interest payments, let alone the principal. And with the former facing bankruptcy, it’s only a matter of time before creditors start liquidating even the things nailed to the ground.
That’s leaving AMC Entertainment as one of the few theaters that might survive the crisis.
It’s much like the consolidating airline industry in 2012 all over again.
The Economics of Movie Theaters
In 2021, AMC earned almost half its operating profits from concession sales – the popcorn and drinks peddled to hungry moviegoers. Without these profits, AMC would have lost around 30 cents for every dollar of tickets sold.
Essentially, the theater industry looks much like concession stands with a movie theater in the back.
One key reason is the high concentration of Hollywood studios. In 2021, 17 of the top 20 highest-grossing hits were distributed by only four companies: Walt Disney, Sony (NYSE:SONY), Universal (NYSE:UVV) and Warner Bros (NASDAQ:WBD).
The result is your run-of-the-mill oligopoly. In 2017, Disney (NYSE:DIS) even made the unprecedented step of asking up to 70% of theater revenues for its latest Star Wars film, almost twice as high as the 40% cut that international movie chains face.
As a movie theater, there’s little you can do.
But a spate of cinema bankruptcies could change that in an instant. And if AMC could somehow acquire Regal and Cinemark, almost 50% of American screens would suddenly become controlled by a single firm. The newly combined firm could theoretically boycott films and force fees down.
And even if mergers are off the table, a reduction in studio take rate to 40%-50% would increase cinema gross profits by up to a third. The industry could go from a turkey into a potential swan within several years.
Don’t Pass the Popcorn Quite Yet…
No analysis, of course, would be complete without a full list of concerns.
First, AMC shares are still speculative at best. CEO Adam Aron has essentially run out of new shares he can issue, hence the creation of APE preferred shares. (Spider-Man NFTs can only go so far in raising capital). And despite Mr. Aron’s best efforts, his indebted firm still has another $5.5 billion of debt to extinguish. Unsecured 2026 debt trades for as little as 60 cents on the dollar.
Second, AMC’s APE shares create a new headache for the firm’s common shareholders. APE shares could theoretically convert into AMC shares someday, 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 take a Herculean effort on Mr. Aron’s part. The company’s $28 million investment in a gold mining company has already alienated institutional investors in an attempt to please retail ones. And shilling more NFTs to moviegoers will eventually do the opposite. (It’s worth remembering that AMC’s public market cap is about the same size as its long-term debt, so Mr. Aron can’t ignore either side).
And finally, movie studios can still pressure a consolidated theater industry. Disney and Paramount’s (NASDAQ:PARA) streaming services could undercut theaters or bypass them entirely. Why pay $15 for a movie ticket when it’s getting released online simultaneously? And if a well-capitalized film distributor like Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) swoops in to buy Regal, their ability to shoulder losses could give a new meaning to the term “non-profit.”
Still, consolidating industries have a habit of surviving… and even thriving… as the number of competitors shrink. And if fundraising from APE shares could tide AMC past its competitors’ bankruptcies, Adam Aron will have earned his place in the CEO hall of fame.
Should Investors Buy AMC Stock?
Consolidating industries can take years to pay off. Delta Airlines merged with Northwest in 2008… But investors needed 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 U.S. cinema industry won’t turn into a golden goose overnight. Bankruptcy cases can last months, and offloading failing 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 meme stock’s implied volatility typically hovers around 150, making call options prohibitively expensive. Speculative-minded investors will likely suffer death by a thousand cuts — known as theta decay by options traders, or “a normal day’s investing” by Reddit’s r/WallStreetBets.
However, historical data tells us that stocks like AMC tend to outperform in the long run. The theater chain trades at a relatively low 1x forward price-to-sales (P/S) — 30% less than 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 on the meme madness fun, buying several shares of AMC stock isn’t the worst idea in the world. (It can’t be any worse than a third Clooney Margarita Cocktail). Because if meme investors have it their way, AMC Entertainment could one day become the last theater chain standing.
Cheers to the King of the Apes.
Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.