Disney (NYSE:DIS) CEO Bob Chapek said on Sept. 21 at a virtual conference held by Goldman Sachs that it wouldn’t commit to releasing films exclusively in theaters beyond 2021. That’s not good news for AMC Entertainment (NYSE:AMC) or the owners of AMC stock.
The loss of Disney content is one of several problems the meme stock faces as it tries to ride retail investors to its highest valuation in its almost eight-year history as a public company.
While Disney will undoubtedly continue to tinker with the balance between theatrical releases and those on Disney+, I don’t think this is the movie exhibitor’s biggest concern.
Here’s why.
AMC Stock and a Lack of Diversification
What would happen to AMC if all the movie producers out there decided to permanently forego theatrical releases, opting instead for movie launches through streaming services?
It would be a bloodbath.
Sure, it could pivot to showing concerts, live sporting events, etc., to keep people coming to its theaters, but the cost of doing that could be astronomical.
Breaking down its six-month revenue through June 30, AMC generated 51% of its $593.0 million in ticket sales. Another 36% was from food and beverage sales, while the remaining 13% was from other revenue such as advertising in the theaters, gift cards and loyalty membership fees.
AMC’s best year for sales and profits was in 2018, when it generated an operating profit of $265 million from $5.46 billion in revenue. Of that, 7.4% was from other revenue, with ticket sales and food and beverage accounting for the lion’s share of sales.
Even after the breakup of the old Hollywood system of studios owning theatre, the Paramounts and the Disneys of the world have always controlled the movie theater chains. Sure, it’s probably never been as strained as it’s become in the past two years as a perfect storm of streaming services going live and the pandemic keeping audiences away has made film studios question the relationship.
“Studios and exhibition have always had a lovely but contentious relationship,” one movie theater operator with locations in the southern part of the U.S. told CNBC in early January on condition of anonymity. “Exhibition is basically a business that has blank screens and empty seats and we can’t do what we do without the studios.”
In my experience, the theater chains, including AMC, haven’t done enough to diversify their revenues beyond their four walls. And while I don’t think the studio-exhibitor relationship will end anytime soon, it might have been wise for AMC to consider a world in which ticket sales weren’t the company’s biggest revenue generator.
Here’s why.
Handcuffed by Debt
The largest movie theater chain in Canada is Cineplex (OTCMKTS:CPXGF). While AMC stock is up 661% over the past year, Cineplex is up just 84%. Both companies hold the largest market share in their respective markets. Both have significant amounts of debt.
In AMC’s case, it’s got a net debt of $9.26 billion, which is 48.8% of its market capitalization. On the other hand, Cineplex has a net debt of 1.87 billion CAD ($1.47 billion), 220.9% of its market cap. So the buyers of meme stocks have certainly made AMC look like a stronger company.
However, if you consider what might happen in the future where studios use streaming for movie launches and then put them into theaters after, Cineplex is miles ahead in terms of diversification.
“While exhibition remains our core business, we continue to innovate and diversify our revenue streams outside of traditional exhibition,” states Cineplex CEO Ellis Jacob on the company’s investor relations page.
Unfortunately, despite taking bold steps to move beyond movies, the company’s plan to open TopGolf locations in Canada in partnership with the U.S. business was called off in 2020 due to Covid-19. It’s become too difficult to execute major projects in such an environment.
To me, the company’s ongoing efforts in amusement solutions and location-based entertainment facilities across Canada — it has 10 Rec Room locations open with as many as 15 in the future and three Playdium locations with as many as 15 in the future — make it a much more attractive private equity target than AMC.
The bottom line is that somebody will take a chance on Cineplex. As value plays go, a recovery ought to mean greater upside for speculative investors.
As for AMC, it better hope Disney and others don’t move permanently to streaming because it’s a one-trick pony with way too much debt to pivot elsewhere.
For this reason, I’d be hesitant to own AMC stock.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
