It's no secret that the movie theater industry was hit hard by the coronavirus pandemic. However, box office sales are once again increasing as economies around the world are gradually reopening.
If you're wondering which companies are best positioned to benefit from the mass return to movie theaters, then keep reading.
Best movie theater stocks
Here are some interesting movie theater stocks for investors to consider:
1. AMC Entertainment
AMC Entertainment (NYSE:AMC) stands as the world's largest movie theater chain. In a surprising turn of events, it also stands as one of 2021's best-performing stocks.
AMC's share price skyrocketed in early 2021, thanks to a short squeeze and the stock becoming a favorite among retail investors on Reddit and other social media hubs. Its pandemic-related dismal performance in 2020 will likely cause the company's year-over-year sales to soar in 2021, but significant challenges remain.
AMC Entertainment added another $1.5 billion to its existing $10 billion in debt over the past year. Repaying that and a sizable interest expense will be a challenge even if the movie theater chain sells more stock. The company lost $4.6 billion in 2020 — understandable in a pandemic — but it was unprofitable in 2019, too.
The other bad news about AMC is that it's become a meme stock, meaning the stock's gains have rendered its trading price as divorced from the company's business fundamentals. The movie theater industry is likely to significantly recover this year, but AMC stock is probably too volatile for most investors.
Fundamentally, AMC retains competitive strength. With competing theaters closing or otherwise facing significant operating pressures, AMC has been able to build market share in the past year. It could emerge as one of the big winners if the movie theater industry enjoys a stronger than expected recovery.
IMAX (NYSE:IMAX) is known for its proprietary screen technology that it licenses out to exhibitors, including AMC. The company has an asset-light business model, and it doesn't have to build or maintain theaters. IMAX licenses include the intellectual property and tech that allow massive screens to show films.
Another competitive advantage is that the company's premium screens allow exhibitors to charge higher ticket prices because many moviegoers are willing to pay more for immersive experiences. This characteristic could become increasingly valuable as movie theater chains contend with, and adapt to, competition from streaming services.
With the theater business increasingly revolving around big-budget, special-effects-heavy films that benefit from IMAX's premium viewing format, the company is on track to play a big role in shaping the future of the industry. IMAX is also financially strong — taking into consideration the effects of the pandemic — and has more cash than debt on its balance sheet.
3. The Walt Disney Company
The Walt Disney Company (NYSE:DIS) is not a pure-play movie theater stock, but few companies are better positioned to benefit if the theater industry experiences a strong recovery. Prior to the pandemic, Disney was dominating the box office, and the House of Mouse will undoubtedly continue to shape the future of cinema.
The company released seven films in 2019 that went on to gross more than $1 billion at the global box office, and its movies recorded more than $13 billion in total ticket sales that year. Getting back to that high mark will be a challenge, but Disney is well positioned to succeed. With its wealth of popular characters and mega-franchises, including the Marvel Cinematic Universe and Star Wars, the company's stable of content is unmatched.
The diversified nature of Disney's businesses makes the company a less risky investment than pure-play movie theater stocks. If recovery for movie theaters is weaker than expected, the company's popular Disney+ streaming service should still enable it to benefit from ongoing growth in demand for streaming media. Disney's parks and resorts and media networks typically also perform well, in part because the media empire has numerous lucrative channels for monetizing its characters and content.
Movie theater industry trends
The coronavirus pandemic caused major theater chains to close for months and operate at limited capacity for even longer. While these pressures are lifting, and the 2021 year-over-year growth of box office revenue will likely be impressive, the movie theater industry faces significant long-term challenges.
The growth of streaming services is reducing the value proposition offered by cinemas. Some large film production companies, including Disney, have opted to release major films not through movie theaters but via direct-to-consumer streaming channels. Other competing entertainment options include video games and social media.
Meanwhile, theater chains are offering new experiences, including higher-quality seating and dining experiences. Although they can differentiate the movie theater experience from at-home viewing, they are not likely to replace demand for streaming distribution services.
Ticket sales for movie theaters will likely soar this year, and some movie theater stocks may perform well in 2021, but investors should approach the theater industry with caution.