Here’s a weird headline you haven’t heard in a while: movie stocks are on the rise.
It’s a weird headline because no one goes to the movies anymore. Before Netflix, Inc. (NASDAQ:NFLX), Hulu, and other internet entertainment options, everyone satisfied their movie cravings by going to the local theater house and watching the latest and greatest Hollywood had to offer.
But that was back in 2002, when nearly 1.6 billion admission tickets were sold in the United States. Since then, Netflix has taken over and people have stopped going to the movies as much.
Last year, the number of movie tickets sold in the US had fallen to 1.3 billion. That is a near 20% decline in roughly 15 years.
But the decline in movie theater attendance is about to reverse. In a big way.
Ultimately, that makes stocks like AMC Entertainment Holdings Inc (NYSE:AMC), Regal Entertainment Group (NYSE:RGC), and Cinemark Holdings, Inc. (NYSE:CNK), which haven’t done much of anything in the past 4-5 years, good buys here and now.
Here’s the scoop.
MoviePass Will Drive Huge Near Term Growth
Whats the big catalyst here? MoviePass. Its’ a subscription business that allows you to pay a set monthly fee to go to the movies essentially as much as you want (you get one 2D movie per day). It’s like Netflix for movie theaters.
And that isn’t so surprising. After all, the company was founded in 2011 by a co-founder of Netflix.
But why all the hype now, 6 years after the company was founded? Prices got cut. Before, MoviePass was charging anything from $15 to $50. Now, it costs only $9.95.
That’s right. There is a service out there where you can pay just $10 per month and go to the movie theater every day.
If you are googling “MoviePass” right now and trying to sign up, you’re not alone. Before the price cut was announced a month ago, MoviePass had less than 20,000 subscribers.
Now, MoviePass has more than 400,000 subscribers.
Almost unequivocally, movie attendance will skyrocket in the near-term. That is a huge boost for movie stocks like AMC, CNK, and RGC because, despite the lower cost for consumers, MoviePass is still paying the full ticket price to movie theater operators.
For example, say an evening showing costs $13 at your local theater. Say you go to an evening showing twice this month. If you’re on MoviePass, you only pay the $10 monthly sub fee and get to watch both showings. But the two evening showings should cost $26.
Whose making up the difference? MoviePass. They are paying out that additional $16.
Near-term, then, movie stocks are big winners. Its higher volume attendance at the same price point, plus dramatically higher concession sales.
Long Term Also Looks Good For Movie Stocks
But what happens longer term? After all, MoviePass can’t run a loss forever?
Well, here’s the thing about movies. The average ticket costs just under $9. So if all MoviePass subs only went once per month, then MoviePass would make a profit of about a buck per sub.
But how often do Americans actually go to the movies? Well, one survey found that less than a quarter of Americans go to the movies once or more a month. Another survey found that the average American attends about 5 movies per year, or less than 0.5 per month.
If American movie going habits remain the same, then MoviePass won’t have any trouble. At 0.5 visits per month and a $9 average ticket, the average cost per sub is just $4.50. That implies monthly profit per sub of more than $5.
But as stated earlier, the lower cost of going to the movies will undoubtedly drive materially higher traffic. I reasonably see the average visits per MoviePass sub being around 2 times per month. If that’s the case, then the average ticket would need to come down by about 50% in order for MoviePass to run a monthly profit.
And that is exactly what will happen. MoviePass will slowly (or maybe even rapidly) build a huge user base that grows accustomed to paying $10 per month for unlimited movie theater visits. They will use that user base as leverage is negotiating average movie ticket prices down to a price point that makes sense for their business.
At first, that seems like an awful thing for movie house operators. Ticket margins will get squeezed. But it’s no big secret that movie house operators get a majority of their profits from concession sales. And guess what happens when movie attendance picks up? So do concession sales.
Bottom Line on Movie Stocks
They are a buy here and now.
The near-term is nothing but positive. Higher volume attendance at the same price point plus a boom in concession sales.
The long-term is significantly more hazy, but I really think movie house operators still come out on top. Either MoviePass falls through and things go back to normal, or movie house operators’ profits surge because a boost in high margin concession sales more than offsets ticket margin erosion.
Because AMC, CNK, and RGC have been so beaten up lately, the downside risk of “things going to back to normal” seems pretty small. But the upside of these stocks heading back to their peaks is huge.
I like that risk-reward assymetry. And I also like movies. So I’m buying RGC, AMC, and CNK stocks. And I’m also signing up for MoviePass.
As of this writing, Luke Lango was long RGC, AMC, and CNK.