The pandemic has devastated movie theaters’ box office receipts, with domestic ticket sales down 81.4% in 2020, according to the website Box Office Mojo. And with tens of millions of new subscribers to streaming services around the world and some movies being released in theaters and on streaming at the same time, the box office might never be the same.
Despite the devastation from the pandemic, AMC Entertainment Holdings (NYSE:AMC) continues to be one of the hottest stocks on the market in 2021. It’s a favorite of meme traders, and some are betting on a short squeeze, but fundamentally the company is in real trouble. And at the end of the day, fundamentals drive an entertainment company’s stock price. That’s why Disney‘s (NYSE:DIS) recent successes show just how much trouble AMC Entertainment is in over the long term.
Disney drives the box office
The reason Disney is so important is that blockbusters are more vital than ever to movie theaters and no company makes more blockbusters than Disney. Marvel, the Star Wars team, Pixar, and Disney are all making very popular movies, which not only generate direct revenue at theaters but also food and beverage sales. If blockbusters disappear, movie theaters are in big trouble. And Disney is looking for a way around theaters.
According to Box Office Mojo, the 2019 domestic box office total was $11.32 billion, and Disney was by far the biggest driver. Its movies were seven of the top eight earners, and those seven alone pulled in $3.44 billion. Like it or not, Disney is the golden goose for AMC.
Disney is cutting movie theaters out
Black Widow wasn’t the first movie to be released directly to streaming customers at the same time it was released in theaters, but it’s probably the best example of what the future of movies might look like. The movie cost $29.99 for Disney+ customers and pulled in $60 million in total from streaming customers. This compares to $80 million at the box office, of which Disney typically keeps about 60%.
Think about the economics of the movie business like this: Disney needed just 2 million premium access sales on Disney+ to make $60 million in revenue and would have needed to sell about 10 million theater tickets, assuming a $10 ticket price, to generate the same revenue.
Given the better economics of selling movies directly to consumers, it’s likely Disney looks for ways to expand this revenue source. Blockbusters might not be going away, but the box office may not be as crucial to Disney’s movie business as it was just a few years ago.
AMC doesn’t have anywhere to go
If movie theaters lose millions of ticket buyers to home movie releases, theaters will be in trouble because they have extremely high fixed costs. Companies like AMC build or lease theaters, which are mostly a fixed cost that ticket sales need to cover. For example, in the first quarter of 2020, AMC’s rent expense was $179.7 million, which wasn’t even covered by $148.3 million in revenue. Operating costs of $576.1 million in the quarter are a minimum revenue bar the company needs to get over. If revenue remains depressed, it’ll be tough to make money at theaters, and there aren’t a lot of alternative uses for this real estate.
Disney’s success in forgoing the box office is a warning sign to AMC’s investors, and it’s hiding in plain sight. I don’t see the movie theater business improving to pre-pandemic levels anytime soon — and maybe it never will. Which makes AMC a stock I wouldn’t touch today.
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