AMC Entertainment Group (AMC +0.00%) and GameStop (GME 3.68%) are two of the most popular stocks of recent times. The duo has the attention of a group of investors from Reddit, who get together to discuss investments.
Rather than choosing which one of these stocks to buy, it appears they are both getting added to portfolios at a flurrying pace. In this comparison, I will avoid talking about valuations. An inflated stock price is common for AMC and GameStop, up 2,000% and 1,000% this year. Instead, let's look at their business prospects to determine which is a better buy.
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AMC
Movie theater chain AMC is burdened with a heavy debt load. At $5.5 billion, its long-term debt has the company paying $240 million in interest expenses in the first six months of 2021. That's a massive sum, considering AMC has only earned above $250 million in operating income twice in the last decade.
Especially since the onset of the pandemic, revenue is lower than usual. From 2019 to 2020, revenue dropped off from $5.5 billion to $1.2 billion. Looking back long term and at the broader industry, movie ticket sales in North America were down 21% in 2019, from the peak in 2002.
And when compared to GameStop, the magnitude of the negative effects of the pandemic is stronger for AMC. The movie theater chain absolutely needs to bring large groups of people to its locations. There is no alternative. It's now the second year since the outbreak, with few signs of eradicating the virus. That does not bode well for AMC's business prospects in the near future.
GameStop
Similar to AMC, brick-and-mortar video game retailer GameStop is experiencing a secular decline. Fewer people are buying physical copies of video games. Why go to a video game store to buy a copy when you can download a copy in the convenience of your home? Worse yet, why order a copy from a website and wait several days for it to arrive when you can download a copy right now?
That's the existential crisis GameStop is facing. Fortunately for the retailer, there is one saving grace: Digital copies cannot be resold. Therefore, gamers who buy a title for $50, play it for a few months, and now want to sell it can only do that with physical copies. Depending on how long they keep a title, gamers get a decent amount selling a game after they finish playing it. After all, the game probably still works well, and to the person buying, it's a new experience because they haven't played it before.
This is where GameStop thrives -- buying and selling used video games. What's more, this dynamic is likely to be long-lasting. Game developers currently sell digital copies for the same price as physical. The downside is that the number of gamers who play enough for this to matter is small. Indeed, in 2009 80% of video game sales in the U.S. were physical copies. In 2018, that figure shrank to 17%. That's a rapid shift that management did not see coming.
However, GameStop's stock rally gave the company another life. It used proceeds from equity sales to pay off all its long-term debt. At a slower pace, it's closing retail locations to right-size its footprint to the evolving market. Eventually, it can operate profitably with fewer stores, meaning lower expenses, serving hard-core gamers through a smaller physical presence and a bigger digital one.
The verdict
If you had to choose just one of these stocks, it should be GameStop. With a digital channel to make sales and without bringing large groups of people together, it is less exposed to pandemic constraints. But most importantly, it does not have the debt burden that's holding down AMC, and it can shrink its way to better profit margins.
