As meme stocks and cryptocurrencies dominate the financial media, it's hard not to enjoy the spectacle. AMC Entertainment (AMC -2.14%) has climbed 2,400% this year alone, even though many of its venues have been closed for a year. It even recently reported a 90% drop in year-over-year sales. Although it is subject to wild swings, the company's current market cap is $23 billion.
Two companies that are about the same size but would seem to offer much brighter prospects are ResMed (RMD -1.27%) and The Trade Desk (TTD -1.44%). They might not capture the attention of social media, but they have the kind of sales, profits, and growth that market-beating investments are built on. Let's dig into a few of the reasons each may deliver better returns than shares of AMC.
ResMed is short for "respiratory medicine," and it commercialized the continuous positive airway pressure (CPAP) machine for sleep apnea three decades ago. It has since expanded its reach to chronic pulmonary obstructive disorder (CPOD) and other diseases. The company has maintained solid growth through innovation in comfort, noise, and ease of use.
Like AMC, revenue was impacted by the pandemic. It's year-over-year growth flattened in 2020 after five years of consistently staying between 9.5% and 13.5%. That's where the similarities end. Even before the pandemic clouded all of AMC's operating metrics, ResMed was creating significantly more earnings before interest and taxes (EBIT) from its sales than the movie chain. That margin is a good measure of the earnings ability of the company without accounting adjustments.
The market for its CPAP machines is enormous and growing. A 2019 study estimated 424 million people worldwide have moderate to severe sleep apnea, and management believes about 80% of those in the U.S. are undiagnosed. The global population of people with COPD is about 380 million and is believed to cost the healthcare systems of the U.S. and Europe about $50 billion per year each. That enormous population and cost gives patients and doctors a lot of incentive to embrace ResMed's solutions. The company currently commands about 32% share in the flow generator market (behind Philips' 63%) giving it room to continue its methodical growth. For investors thinking about long-term stability, the wind at the back of ResMed should keep blowing for decades.
2. The Trade Desk
The Trade Desk might be the perfect stock to buy as the antithesis of AMC. While AMC relies on people getting out and going to see a movie, The Trade Desk provides digital advertising solutions to help ad buyers create, manage, and optimize multi-channel ad campaigns. That means advertising across mobile, connected television, audio, social, and display ads -- all of the places someone might stream content when they decide to stay home. Every time that happens, AMC loses and The Trade Desk gains. It's happening more and more. The company saw $4.2 billion in gross spend on its platform last year. That was up from just $552 million in 2015.
In contrast, the number of box office tickets sold has been slowly declining for 25 years. Exceptional years like 2002 (with a Lord of the Rings, Harry Potter, and Star Wars movie) and 2009 (with a one-of-a-kind movie like Avatar) will occasionally break the trend. Even pre-pandemic, the sales growth highlights the difference between the two companies.
Is it investing or speculating?
Research suggests our brains are wired to feel financial loss much more than gain. Unfortunately, greed and a fear of missing out can blind us to risks until it is too late. For some holders of AMC Entertainment, the current mania and fantastic gains in 2021 may be overshadowing the underlying performance and prospects for the business.
A great litmus test is to imagine your bank account with enough money to simply buy either AMC, ResMed, or The Trade Desk outright. The rational choice would be one of the companies with a growing customer base, increasing sales, and loads of cash. That may be boring, but it's what investing in stocks represents.
Buying an asset solely because someone else might buy it for more is speculation -- and speculation is a kinder way to say gambling. Although no one can know how high the stock price for AMC might climb in the short term, gambling is a risky way to make money. That's especially true if you can't afford to lose it. A better way to get rich is to buy great companies and own them for a decade or more.