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Better Buy: AMC vs. Roku

By Anders Bylund – Apr 8, 2020 at 7:11AM

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Catch a falling knife or buy a skyrocketing growth stock in its early years? Your choice.

If movie theater chain AMC Entertainment Holdings (AMC 0.54%) represents the old guard of the entertainment industry, media-streaming specialist Roku (ROKU 2.68%) is a champion for the next generation.

Both stocks have fallen hard in 2020. Roku's stock is down by 33% year to date and AMC has posted a 60% drop so far. But I think you'll agree that only one of them looks like a good buy at these dramatically lower prices.

A young woman with a surprised expression on her face dips into a very large bucket of popcorn.

Image source: Getty Images.

Don't touch this one

AMC operates the largest movie theater chain in the world, collecting $5.5 billion of top-line revenues in 2019. That massive revenue stream is not generating a ton of profits, though. The company showed only $240 million of operating income last year, resulting in negative bottom-line earnings and jut $60 million in free cash flows.

When AMC and all other theater chains closed down its screens last month, credit rating specialist Moody's lowered AMC's corporate credit rating to a highly speculative B3 with a "substantial risk" rating on the company's senior debt papers. S&P's evaluation in early April was even rougher, dropping the company's corporate rating deep into speculative waters.

"We expect [AMC] theaters will remain closed beyond June due to the impact of the global coronavirus pandemic," the credit rating agency wrote. "We do not believe AMC has sufficient sources of liquidity to cover its expected negative cash flows past midsummer."

In other words, AMC was in deep trouble before the coronavirus crisis and the situation is only getting worse. Bargain-hunters might be drawn to AMC's rock-bottom valuation ratios at 0.05 times trailing sales and.25 times AMC's book value. Those are actually huge red flags, indicating a deeply troubled business that may not be long for this world.

Here's the big winner

Roku is a very different beast. The company reported far lighter revenues last year, stopping at $1.1 billion, and Roku's profit margins are consistently worse than AMC's across the board. These results would be terrible for a mature, slow-growing company like AMC, but it's exactly what investors expect from a high-growth stock like Roku.

ROKU Revenue (TTM) Chart

ROKU Revenue (TTM) data by YCharts

The coronavirus is not much of a threat to Roku's skyrocketing revenue growth. This is one of those companies that actually thrive when Americans stay home from work, looking for ways to fritter away the hours in their own living rooms. Sure, Roku benefits when people order Roku-powered TV sets or set-top boxes from their favorite e-commerce vendor, but that's not the whole story. Roku also provides ad space on its media-streaming platforms, so longer viewing hours should equal higher ad sales.

The media player hardware is essentially sold at cost to drive faster top-line growth. Spare cash tends to get shoveled right back into the system for now, driving even more sales growth through heavier marketing efforts.

The company could generate modest profits in a hurry by turning down the heat on those growth-boosting ideas, but that won't happen anytime soon. You're watching a global media giant in its formative years.

This stock shouldn't even trade lower on coronavirus concerns, so the current bargain-bin discount on Roku's shares is a fantastic buying opportunity.

Anders Bylund owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$7.49 (0.54%) $0.04
Roku Stock Quote
$60.47 (2.68%) $1.58

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