I’ve repeatedly summarized all the reasons I’m skeptical of investing in the movie theater business. But even if you assume movie theaters are a sound long-term investment, AMC Entertainment (NYSE:AMC) stock isn’t the best stock to buy.
If you want to gamble on meme stocks, AMC stock will certainly be a fun time. The AMC “ape army” is large, very funny and extremely active on social media.
But if you want to make a smart, long-term investment in a movie theater recovery, IMAX (NYSE:IMAX) is your best bet.
Movie Theater Numbers
It doesn’t take much time to make the case that the movie theater business is a bad investment. Forget the pandemic. U.S. total domestic box office sales in 2019 were $11.32 billion. In 2016, total U.S. domestic box office sales were $11.37 billion. From 2016 through 2019, AMC averaged an annual net loss of $103.6 million.
Movie theaters will not be disappearing. Going to the movies is a fun experience from time to time. The problem is that people have increasingly impressive HD smart TVs at home. There are more streaming platforms releasing original content than ever before.
AMC stock bulls believe in a comeback of movie theaters. I’m certain movie theaters have and will continue to rebound from pandemic-level numbers. The million-dollar question is will they continue to grow over time? What they ever make it back to 2016 levels?
Sure, people will continue to go out to the movies. People who went to see four movie theater movies per month may see two or three per month by 2023 or 2024. I’m not predicting an end to the movie theater industry. But a 25% to 50% drop in revenue is a major problem for AMC stock investors.
IMAX Over AMC Stock
Let’s assume for a minute that you ignore Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) and all the other streaming services. Let’s assume you want to bet on movie theaters. To me, that’s akin to ignoring Netflix in 2016 and betting on Blockbuster Video. But let’s assume that you believe the future of the entertainment industry is movie theaters.
Macquarie Research analyst Chad Beynon recently released a note that included a deep dive into the entire movie theater industry.
In the note, Beynon downgraded AMC stock and had some harsh words about its valuation. He pointed out that AMC shares are up more than 500% in the past 12 months, while the movie theater group as a whole is up just 11%.
Beynon also said AMC will not be free cash flow positive until 2023.
“Looking forward, fundamentals are nowhere near where shares are trading given the company carries deferred rent of $420m (2Q21) in addition to its annual rent expense of $1bn; normalized maintenance capex is ~$140m, and annual interest is ~$420m,” Beynon says.
Macquarie has an “underperform” rating and $6 price target for AMC stock.
Instead, Baynon named IMAX as his top movie theater stock pick. IMAX is growing, it has a much healthier balance sheet than AMC and it is a much better value. In the past seven years, IMAX has grown its total number of screens from 863 to 1,654, Beynon said.
“Additionally, we believe the company’s leading margins and well-capitalized balance sheet support our positive view,” he says.
Macquarie has an “outperform” rating and $26 price target for IMAX stock.
Don’t Pair Trade
AMC stock apes won’t care about anything Macquarie has to say. They certainly don’t care what I have to say. They like the stock.
But for people that want to make sound long-term investments, AMC stock is not the way to play a movie theater recovery. AMC stock trades at 28.2x sales. IMAX trades at 5.2x sales. AMC stock has $3.7 billion in net debt. IMAX has $11.8 million in net debt.
In 2019, AMC generated a net loss of $149 million. IMAX generated a net profit of $46.8 million.
To be clear, I wouldn’t and haven’t invested in either of these stocks. I believe movie theater ticket sales were likely in secular decline even before the pandemic. But IMAX is clearly more appealing as a movie theater rebound investment in virtually every way compared to AMC stock.
Before I wrap up, I want to add one warning. Normally, I’d recommend a pair trade in which investors go long IMAX stock and short AMC stock. In this case, I would never short AMC stock under any circumstances. AMC stock price disconnected from reality a long time ago. It is now the ultimate cult stock.
AMC stock trading at a $24.5 billion market cap is just as insane as it trading at a $245 billion market cap. Once a stock is disconnected from fundamentals, it can go anywhere in the near term. Do not short AMC stock unless you are prepared to endure very heavy losses.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.