3 Reasons I Bought AMC Stock This Month

It's the headline I never thought I'd write: Yes, I'm now an AMC Entertainment (NYSE: AMC) shareholder. It's a small position in my portfolio, reflecting my hesitant, skeptical conviction. And I'm fully aware of how ridiculous it seems to anyone who has done due diligence on the country's largest multiplex operator.

This is a stock that has cratered, split-adjusted, by 99.5% over the past five years. AMC has brutally diluted its shareholders, flooding its share count -- again, split-adjusted -- roughly fiftyfold since the end of 2019. CEO Adam Aron has somehow survived through the deluge.

I see the red flags. But I also see the green shoots. Most of my fellow Fools will disagree with me, and I respect that. Still, here are my three reasons for becoming an AMC shareholder earlier this month.

Image source: Getty Images.

1. Movie theaters are back

By the time Marvel's Avengers: Doomsday hits your local multiplex this holiday season, it will become at least the sixth movie to top $1 billion in worldwide ticket sales this year. This will be only the second time that theaters globally have had six or more movies topping $1 billion in box-office receipts. The only other time it happened was in 2019.

You will counter that inflation has pushed ticket prices higher, and that's fair. The actual number of tickets sold -- in this country, at least -- peaked 24 years ago. However, there's no denying that moviegoers are coming back. It's not just about the industry's obvious tentpole releases that people are going to see. Even a couple of low-budget horror flicks made by young directors became sleeper hits this year.

AMC stock is back. The shares are up 58% this year, as folks return to the corner cinema. Hollywood gets it. The same studios that were tightening their release windows to get their films streaming as soon as possible are shifting gears to cash in on the new ascent of the silver screen. Even Netflix is playing along. Greta Gerwig's The Chronicles of Narnia: The Magician's Nephew will be in theaters next February, 45 days before streaming on the service itself.

2. The laggard could be a leader

The tide is turning, and it's also rising to lift all ships. The conservative play here would be to turn to AMC competitors and other beneficiaries of the cinematic revival. In the same five years that AMC has surrendered more than 99% of its value, smaller rival Cinemark has more than doubled. It's also on its fourth consecutive year of profitability, and it even pays a quarterly dividend. AMC partner and experience supersizer IMAX has more than tripled.

However, despite generating 56% more in trailing revenue than Cinemark, AMC trades at an enterprise value of just 1.7 times its trailing revenue. That's a discount to Cinemark's comparable multiple of 1.9. The market leader doesn't often trade at a discount to its peers, but the big knock here is that AMC isn't consistently profitable.

AMC isn't expected to post an annual profit until 2028, a decade since the last time it did. However, AMC grew its top line faster than Cinemark last year, and it's doing so again on a trailing basis. A lot can go wrong between now and 2028, but think of all of the things that have gone right as AMC shares trounce the market this year.

3. It's not just about the ticket sales

A big knock on buying into any multiplex operator is that success isn't in the exhibitors' hands. They're at the mercy of the studios and the exclusivity windows they provide. No compelling flicks, no ticket taker clicks. However, AMC has taken it upon itself to make its own luck.

It has elevated the moviegoing experience with reserved seating, improved snack and beverage offerings, and member loyalty subscriptions. Its free AMC Stubs tier now accounts for half of its audience. The premium-priced AMC Stubs A-List -- through which folks pay as much as $30 a month for access to four weekly screenings -- now has 1.1 million paying members, accounting for 20% of its visits.

You might think charging someone $30 a month for at least 16 viewings across all formats is a loss leader. A single weekend evening IMAX screening will run you north of $20 in many major markets. However, this isn't the poorly conceived third-party MoviePass offering that went bankrupt more than six years ago. It keeps roughly half of the ticket sales, with studios retaining the rest. Someone getting a deal on a viewing is also likely to butter up to the concessions stand, where the serious money is made.

Admissions accounted for 54% of AMC's $1.6 billion in revenue for its latest quarter. Concessions made up just 36% of the top-line mix, but with that segment's 81% gross margin, those food and beverage sales accounted for a larger gross profit than the box office. Filling up seats also boosts its high-margin ad revenue prospects.

I'm just scratching the surface here. AMC is rolling out collectibles with major movie releases, has a deal to stream live concerts at a premium, and is renting out its facilities during quiet times. AMC's boardroom failed investors when the business was struggling, taking advantage of the short-lived meme-stock pop to distract and dilute its shareholders. Now that improving fundamentals and momentum are behind the wheel, it will be harder to swerve into another wreck.

"We come to this place for magic," Nicole Kidman famously says at the start of the iconic ad that plays before every AMC screening. Investors -- and not just the speculators who have suffered on the way down over the past five years -- are starting to realize that the magic might be real this time.

Rick Munarriz has positions in AMC Entertainment and Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.