Forget AMC: This Growth Stock Is a Better Buy

AMC Entertainment Holdings (AMC 3.96%) has crushed the market this year, with the stock surging 2,080% since January. However, the Reddit-fueled enthusiasm surrounding AMC has also made it a very dangerous investment.

Over the past six months, retail investors have orchestrated campaigns across social media, urging people to buy the stock. They've done so in the hopes of sparking a short squeeze, an event that occurs when rising prices force short sellers to cover their position by purchasing the stock, creating a snowball effect that sends the stock price even higher.

Unfortunately, that type of short-term thinking is tantamount to gambling. There's no guarantee it will work, and many retail investors are likely to get burned in the process. So, rather than waste money on meme stocks, investors should look for better ways to build long-term wealth. For example, Roku (ROKU -10.29%) looks like a better buy. Here's why.

Image source: Getty Images.

AMC Entertainment Holdings

Before the pandemic, the movie theater industry wasn't doing so well. Between 2010 and 2019, box office revenue grew at less than 1% per year. But things got much worse when the coronavirus forced theaters to close.

After shutting the doors, AMC was left with over $4.7 billion in long-term debt and $5.0 billion in lease liabilities, but virtually no income. In fact, attendance and revenue plunged 79% and 77%, respectively, last year. And despite the reopening of many theaters in the first quarter, attendance and revenue continued to fall, dropping 89% and 84%, respectively.

Even worse, AMC was forced to issue more debt and sell new shares throughout the pandemic. And while those kept the company in business, its financial situation is now dire. Long-term debt has ballooned to $5.4 billion and the company's balance sheet is insolvent, meaning it has more liabilities than assets.

To that point, the company recently raised $1.2 billion in equity during the second quarter; and while that decision makes sense, as it allows AMC to convert its soaring share price into currency, the move also further dilutes shareholders. Notably, since the end of 2019, AMC's outstanding share count has surged 380%.   Moreover, even after this recent at-the-market offering, AMC is still in trouble.

In fact, in order to meet its minimum liquidity requirements (i.e. pay rent and interest), attendance must reach 85% of pre-pandemic levels by Q4 of 2021. If that doesn't happen, AMC would have to restructure its liabilities, either by liquidating assets or filing for bankruptcy..  And in either case, shareholders would "likely suffer a total loss of their investment," according to management. Moreover, AMC's credit rating -- currently at Caa3 in Moody's rating system, indicating substantial risk -- would be further damaged for years. That's why I wouldn't buy this stock with free money.

Image source: Roku.

Roku

Unlike AMC, Roku appears to be on the right side of history. The company is capitalizing on the rise of connected TV (CTV) and streaming entertainment, which have slowly taken share from traditional options like cable and satellite. Specifically, Roku allows users to access and manage all of their streaming services (subscription and ad-supported) from one location.

In large part, Roku monetizes its business through digital ad sales. That's why it acquired ad tech specialist dataxu in 2019. This move allowed Roku to combine its own first-party data with dataxu's attribution tools, creating Roku OneView -- an ad tech platform that helps marketers plan and launch data-driven campaigns across mobile, desktop, CTV, and linear TV, reaching four out of five homes in the U.S.

But Roku didn't stop there. The company has also invested aggressively in its own ad-supported streaming service, The Roku Channel. For example, it acquired programming from Quibi in January, and added 30 original series to The Roku Channel in May.

So far, this ad-powered growth strategy is paying off. During the first quarter of 2021, ad impressions delivered through the OneView platform nearly tripled. And the company reported record streaming on The Roku Channel in early June, following the launch of its original content.

What's more, Roku's investments have also translated into a strong financial performance.

Data source: Roku SEC filings. TTM = trailing 12 months. CAGR = compound annual growth rate.

Looking ahead, Roku should benefit from several catalysts. First and foremost, more consumers are cutting the cord each year, shifting away from traditional linear TV. As that trend plays out, Roku should continue to see strong growth for active accounts. That, in turn, should bring more advertisers to its platform, driving revenue higher.

Likewise, Roku's pursuit of original programming could supercharge this dynamic. As it adds new entertainment options to The Roku Channel, more viewers should stream ad-supported content. If that happens, it would likely drive an even greater uptick in ad spend on the platform. That's why investors should consider adding this growth stock to their portfolios.