The long running bear thesis on AMC (NYSE:AMC) stock is fairly well known and simple. The at-home economy is here, and it’s only growing. One facet of this economy is that, with the birth of Netflix (NASDAQ:NFLX) and the broader streaming-video-on-demand (SVOD) space, there has been an enormous migration of entertainment from the movie theater, to the home. This migration has adversely impacted movie theater traffic, and in turn, kept AMC stock stuck in neutral for almost this entire decade.
But, at this point in time, the bull thesis on AMC is just as simple and arguably more compelling.
That bull thesis goes something like this:
Movie theaters aren’t dead. Sure, consumers don’t need to go to a movie theater today because they can get a full slate of high quality content from their own couches, but, humans are social creatures who value experiences. Going to the movie theater has increasingly turned into an affordable experience. As such, consumers still want to go to the movie theater today, and have been going in great frequency over the past several years.
This trend will persist. AMC’s traffic trends, revenues, and profits will stabilize and improve. And AMC stock will head higher.
This long term bull thesis in AMC will gain traction and clarity in 2019 amid record box office results. As it does, investors will buy into the improving growth story, bulls will take control, and the stock will fly towards $20.
Movie Theaters Aren’t Dead
The core of the bull thesis in AMC stock rests on one major idea: movie theaters aren’t dead.
In words, this core ideology is easy to understand. As consumers, we have so many options at home that when we want to watch a movie, we don’t have to go to the movie theater. Instead, we can just flip on the TV, go to a streaming service, and watch a movie for a fraction of the cost of going to a theater.
But, we don’t go the movie theater just to watch a movie. Going to the movie theaters is a night out for many consumers. It’s an experience and now, more-so than ever before with many movie theaters improving their offerings with full food and drink menus, comfortable recliner chairs, and lobby seating areas.
Importantly, consumers value experiences more today than ever before, and as such, the value of the movie theater experience today is still very high, even in an SVOD-dominated world.
That’s why consumers still frequent the movie theater fairly often and will continue to do so for the foreseeable future. It’s a social experience that cannot be fully replicated at home.
The numbers support this thesis. Although Netflix has grown from 25 million subscribers in 2012, to over 150 million subscribers today, the total number of tickets sold per year at the box office has been largely stable during that stretch around 1.2 to 1.4 billion. In other words, although Netflix has grown its subscriber base by six fold over the past seven years, movie theater attendance has been largely stable during that same stretch.
Ultimately, because movie theaters are the irreplaceable social experience arm of studio entertainment, this stability will persist. As it does, AMC stock will head higher.
AMC Stock Has Good Upside
At current levels, AMC is priced as if movie theaters are doomed for the graveyard. That won’t happen. Instead, movie theaters will stick around for a lot longer. As it becomes increasingly obvious that survival is the reality here, AMC stock will move materially higher.
First, it’s important to understand that AMC is dirt cheap. It trades at under 0.4-times trailing sales, which is essentially equivalent to an all time low valuation for the stock and largely prices in bad results to persist for a lot longer. Thus, in the event that the numbers do improve, AMC has healthy runway to move materially higher through multiple expansion.
Second, it’s equally important to understand that AMC will benefit from improving sentiment in 2019. Avengers: Endgame broke every single box office record imaginable this past weekend. That’s just the first blockbuster movie in what projects to be a record year for the box office.
From Disney (NYSE:DIS) alone, the box office in 2019 will comprise an Aladdin remake, a Lion King remake, Toy Story 4, Frozen 2, and a new Star Wars movie.
Thus, calendar 2019 should be one for the record books for movie theaters. As positive box office results roll in, against the backdrop of Netflix still adding millions of subs each quarter, it will become increasingly obvious that the movie theater business can grow parallel to a red hot SVOD market. As that does become increasingly obvious, investors will flock back into AMC and the stock will fly higher.
How high can AMC go? My numbers suggest that $20 is doable this year. As such, I think $15 looks like a good place to load up on AMC ahead of a record year.
Bottom Line on AMC Stock
Contrary to popular belief, movie theaters aren’t dying. Instead, they are successfully adapting as the irreplaceable social experience arm of studio entertainment. Consequently, this business projects to remain healthy for a lot longer, meaning that AMC’s numbers should stabilize and improve over the next few years.
Right now, this thesis lacks clarity. By the end of 2019, on the heels of what will turn into a record box office year, that long term bull thesis won’t lack clarity. As such, between now and the end of the year, AMC stock will likely run higher as its long term bull thesis gains clarity.
As of this writing, Luke Lango was long AMC, NLFX, and DIS.
