Media-streaming veteran Netflix (NFLX 2.51%) and movie theater operator AMC Entertainment (AMC 5.43%) have a lot in common -- but they are nothing alike. One company represents the future of the filmed entertainment industry while the other is a relic of Hollywood's fading legacy. Yet both are extremely popular investments with massive daily trading volumes. So, lots of investors are asking whether they should buy Netflix or AMC on any given day.
Let me show you why the answer should be obvious.
AMC is a risky gamble
Surely, you remember AMC's hair-raising market action in 2021. Swept up in the meme stock craze alongside fellow speculative names such as GameStop (GME 29.07%) and BlackBerry, AMC's stock mixed skyrocketing jumps with sudden crashes. AMC shares gained 527% in January and 219% in May but also lost 30% or more in February, July, and August. This stock was more volatile than Bitcoin or Ethereum in many ways, with a 1-year beta value of negative 3.9. A value investor could lose a good night's sleep for less.
None of the market shenanigans would matter if AMC had a healthy business with bright prospects. But, unfortunately, that's not the case.
Movie theaters suffered weak ticket sales for many years before the coronavirus crisis came along. Annual ticket sales started trending downward in 2003, forcing AMC and friends to generate higher revenues by raising ticket prices every year. The consistently rising ticket fees didn't exactly invite audiences to fill up those empty theater seats any faster, driving the vicious cycle further and further.
Image source: Getty Images.
And then the health crisis rolled in, closing down movie theaters and production sets for many months. Theaters are now open again, but the foot traffic is nowhere near what it was in 2019. Since AMC is saddled with the enormous fixed costs of owning or leasing, maintaining, and staffing its network of more than 950 theaters and 10,500 screens, the lack of top-line revenues can be terrifying.
AMC's free cash flows were barely breakeven in 2019. Last year, the company burned $715 million of free cash on a revenue stream of $2.5 billion. That's no way to run a business in the long run. In order to keep the lights on, AMC took advantage of its abnormally high share prices to raise $1.57 billion of sorely needed cash from sales of new stock. The share count has grown fivefold since the summer of 2020:
AMC Average Diluted Shares Outstanding (Quarterly) data by YCharts
Some of last year's meme stock champions might actually see better days ahead. GameStop, for example, also bolstered its balance sheet and now runs under new management -- in an industry with more room for strategy shifts and innovation. This business could perhaps thrive as an online entity with fewer physical stores (or none at all). If you try that idea with AMC, you've just created another streaming service with a familiar brand and no in-house content production facilities.
Netflix is a great investment
This is almost unfair. Netflix is a shining example of how to succeed in show business nowadays.
First, Netflix knows how to generate serious sales growth through a combination of modest price increases and exciting subscriber growth. The company posted 16% higher revenues in 2021 while subscriber counts rose by 9%. The addition of 8.3 million net new subscribers in the fourth quarter and the prospect of 2.5 million additions in the ongoing quarter were seen as major disappointments, although this slowdown should look like a mere speed bump when you look back at 2022 in the future.
The company is not only a successful broadcaster of filmed material, but also an award-winning producer of original shows and movies, with a projected production budget of at least $11.8 billion in 2023. On top of the proven video-streaming platform, Netflix has also started to dabble in video games as a free add-on to the video service. That line of business is a hobby so far, though Netflix is pouring real money into the development of more gaming titles.
So Netflix looks like a media conglomerate for the ages, still in its formative years. And the stock is found in Wall Street's bargain bin after that mildly unsatisfactory fourth-quarter report, trading at prices not seen since the spring of 2020, and the most affordable price-to-earnings ratio in nearly a decade.
Long story short, Netflix is a no-brainer buy at the moment. AMC, on the other hand, is a stock I wouldn't touch with a 10-foot popcorn bucket.
