AMC Entertainment Holdings (AMC 1.08%) was a gymnastics star last year, but it didn't exactly stick the landing. The stock shed more than half of its value through the last seven months of the year. However, thanks to a shorts-blazing surge through the first five months of the year, AMC still wound up being the country's best-performing large cap for all of 2021. Shares of the country's leading multiplex operator were nearly a 13-bagger last year, and this is with its share count increasing nearly fivefold over the past four quarters.
There are two loud camps when it comes to AMC. The more vocal bulls argue that hedge funds are manipulating the stock's downturn through naked shorts and synthetic shares. The bears argue that movie theaters are on a path to extinction, and creditors will eventually zero out today's stockholders after AMC declares bankruptcy.
Just like the stock itself in 2021 -- a wealth-altering find through its peak in early June and then a portfolio destroyer for the last seven months -- opinions on AMC tend to go to extremes. But there's a third camp that doesn't garner the same kind of media attention as the two polarizing sides. I'm in that camp. I see AMC surviving. I just think the stock is overvalued by all historical benchmarks. Maybe you're like me. It's probably a good time to tell our side of the story.
What the bears are missing
The pandemic was understandably rough for exhibitors, and it's not as if the movie theater industry was booming before the COVID-19 crisis rocked your local multiplex. Domestic ticket sales peaked in 2002 when nearly 1.6 billion tickets were purchased. We were at 1.2 billion seats sold in 2019, the last full year of operations and the baseline for the market's recovery. Ticket prices have inched higher most years, and in terms of revenue the high-water mark is fairly recent. The industry sold a record $11.9 billion in admissions in 2018. However, adjusted for inflation, that is 17% below the peak set nearly two decades earlier.
This may seem like a bleak start to a section about what the naysayers have wrong, but this is the scene-painting that is necessary to flesh out the environment that our protagonist is dealing with right now. AMC is gaining market share in this climate. It's carving out a thicker slice of what appears to be a shrinking pie, and there is little competition to get in the way. You can't shout "fire" in a once-crowded movie theater, but you can shout "fire sale," and that's just what is happening. AMC's biggest rival shut its theaters down twice in the pandemic, whereas AMC only had a couple of months of downtime. AMC has not only reopened its once-shuttered locations, but now it's starting to nibble at abandoned rival locations. AMC is emerging as a larger player, and with that comes scalability and power with Hollywood studios.
The product is also getting more financially lucrative. An obvious example is the concessions stand. Ticket sales are a cover charge, and those admissions get divvied up between the theater operator and the movie studio. The real margin markups take place when folks grab a tub of popcorn along with other snacks and beverages to wash it all down. Folks have come back hungry and thirsty to the multiplex, and AMC made the most of the pandemic lull by expanding its mobile ordering platform, where consumers are spending more than they would and saving time in the process. Food and beverage sales at AMC this past summer were up 42% per customer from where they were two years earlier.
AMC is also incentivizing people to order movie tickets earlier, shifting more of its sales to reserved seating. The move to reserved seating was necessary early in the pandemic when folks needed to be socially distanced, but it also prompts moviegoers to order early to secure the best seats. With last month's move to offer non-fungible tokens (NFTs) to the earliest pre-orders for Spider-Man: No Way Home, AMC now has a new digital tool to spur early ticket sales. Finally, despite sometimes crossing the thin line between promoting his business and touting its stock, CEO Adam Aron has done a great job of making AMC's millions of retail investors feel as if they have a direct hand in the chain's survival and ultimate success. You have to appreciate when a market leader isn't complacent, and AMC -- along with Aron -- isn't afraid of raising the bar and disrupting its own earlier model.
What the bulls are missing
I can keep this section more concise. Even after shedding 63% of its stock price over the past seven months, AMC isn't exactly cheap. With a market cap of $14 billion and a debt-saddled balance sheet that props up its enterprise value north of $23 billion, AMC is trading at optimistic multiples of its forward revenue and eventual return to profitability.
It's also problematic that many of the more widely followed AMC bulls on social media have razor-thin histories of success in making stock market calls before the meme stock phenomenon. You have to start somewhere, but it's concerning that they are more bent on discussing short-selling theories that Aron himself debunked over the summer than discussing legit bullish arguments like margin expansion or the positive transformation of AMC itself. It's almost as if they are more focused on sensationalism to boost their clout and monetization opportunities as influencers than to take a step back to flesh out a discounted cash flow analysis to justify a big round price target on the stock. The narrative of individual investors against hedge funds is mesmerizing, but -- as Spidey himself was once told -- with great power comes great (fiscal) responsibility.
Challenges await AMC. Gaining share in a shrinking market doesn't change the fact that the pie is getting smaller. Outside of superhero flicks, consumers have grown fond of streaming releases at home, and movie studios aren't likely to return to the lengthier theatrical release exclusivity windows of the past. Analysts see AMC at least a couple of years away from returning to profitability. There's a bullish counter on that front -- as mobile ordering, reserved seating, NFT promos, and a strong 2022 pipeline of action flicks can boost the money-making potential of movie theater stocks -- but who has time to hear both sides of the story these days? I'd like to think that this third side of the story is the reasonable one, but good luck getting heard when the two extremes are shouting.