Sometimes, a statistic is just crazy enough to make it the story of the week. This month that’s this:
At various times in June of 2021, AMC Theaters was more highly valued than half of the S&P 500.
That’s crazy enough to be…
Most Important Story of the Week – Please, Please, Please Do NOT Use Stock Price as a Proxy for Value
The analytics explosion in sports, especially basketball, helped inspire this website. Specifically, the expansion of analytics to interpret and improve the coverage. Countless writers or websites like Basketball Reference, Jeff Sagarin, Ken Pomeroy, John Hollinger and Kevin Pelton use numbers to deliver insights you won’t find elsewhere. I want to help deliver that same change to the business of entertainment.
The problem with the analogy is two fold: Unlike sports, there is no “end”. Each game ends and so does each season. Further, there are no “winners” in business. In a few weeks, an NBA team will be crowned champion and every other team will look on in envy. (Especially if your star power forward got injured in the first round. I’m not bitter as a Lakers fan.)
Who are the winners in business? And when does the game or season end?
In the professional league of the streaming wars, Netflix is regularly crowned the “champion”. But that’s not quite official. That’s just the opinion of journalists looking for flashy headlines. And it is usually driven by one metric: stock price.
That’s right, stock price, stock price, stock price. And maybe the resulting “market capitalization”, the number of shares outstanding multiplied by the stock price, a rough proxy for the size of a company. Netflix had an incredible run of growth in the 2010s. Hence, they have “won”, if you’re a shareholder. And you stop at the end of the decade:
The last few months, though, have been a lesson in the dangers of relying on stock price as a measurement. At its worst, I’ve seen folks who point to a stock at its peak and say, “Hey look, I was right!” then ignore when that same price comes crashing down or stalls out. That’s lazy/sloppy analysis.
Worse than lazy/sloppy journalism, though, is the growing feeling that stock prices are untethered from economic fundamentals. In February, this idea took hold when GameStop, a retail video game store, became the generic term for “meme stocks”. In the span of a few days, it suddenly saw quadruple digit growth. This frenzy was driven by an online-organized, socially-motivated group of retail buyers who bought and held to boost the price. And I doubt you missed reading about it at the time, given that the GameStop fiasco led to Congressional hearing.
A few weeks later, it seemed as if this trend had come for entertainment. As I wrote at the time, ViacomCBS and Discovery had suddenly seen their stock prices surge. They skyrocketed. Since no one knew what was happening, naturally folks asked, “Are the Meme Lords of WallStreetBets back at work?”
Not quite. Essentially, one very wealthy investor–in a shop called Archegos Capital–decided to buy a handful of tech and media stocks “on margin”–meaning using loans–and did it in secret by having brokerages buy the stocks so that their out-sized positions wouldn’t be noticed. The owner–Bill Hwang–kept plowing his winnings back into more leverage. This drove the stocks up, up and up. All was good until the stock prices finally dipped, at which point the brokerages executed “margin calls”, asking for more capital, and the stock price cratered. Billions were wiped out at several investment banks and many bank executives were fired.
But the madness hasn’t stopped! In the last few months, WallStreetBets turned their energies towards AMC theaters. And now AMC theaters–a company with a business model in disruption–is now more valuable than Delta Airlines. Everyone expects it to collapse in on itself, but instead it has held most of the gains through June. AMC Theaters is even worth more than ViacomCBS. Just two months ago that situation was completely reversed.
What is the difference between Archegos Capital going all in on one stock and WallStreetBets going all in on another? In each case, “investors” see growth opportunities in a stock price. Maybe it is based on “fundamentals” or not. But in each case, investors believe a stock price will keep going up, so they buy more stock, the stock goes higher and the cycle repeats.
Which brings us to Netflix.
On the one hand, the stock price growth has been incredible. But there is a large chorus of stock pickers and analysts who have never understood this valuation. They believe, frankly, that it is divorced from the fundamentals, especially if “fundamentals” mean the discounted future cash flows of Netflix.
(As some have pointed out on Twitter, Wall Street has habitually overestimated Netflix’s future revenue, subscribers and free cash flow.)
But lots of other folks disagree. Netflix was, in the 2010s, a growth machine when it came to subscribers and revenue. But not when it came to free cash flow. This led New Constructs–a group whose work I love–to call it “the first meme stock”. Because really, what is the difference between a single investor overvaluing ViacomCBS and Discovery, WallStreetBets overvaluing GameStop and AMC, and lots of investment banks overvaluing Netflix? Indeed, there is a minority community that just doesn’t understand the Netflix share price over the last few years. But what none of the Netflix Bears denies is that it’s tough to bet against Netflix since the price just isn’t backed by fundamentals. Like GameStop, AMC theaters, and ViacomCBS before it.
Which sort of ties together why I dislike stock price as a proxy for value. In each case, the driver is really the amount of folks buying a stock, not who is right about the growth prospects. That comes later, but at an undetermined time.
Ignore stock price, and focus on profit, cash flow, return on investment, and their drivers. This is obviously much more complicated, but it is more reliable. Especially if you’re trying to evaluate strategy or leadership at a company.
This doesn’t mean one should ignore stock prices entirely. They matter, especially when it comes to strategic opportunities. Netflix having such a large market capitalization means it essentially can’t get acquired by a fellow Big Tech company. Same for Disney. At the same time, AMC theaters having a huge stock price means it can sell stock and use the capital to invest in its business, while ViacomCBS–which tried to take advantage of it–cannot.
Almost Most Important Story of the Week – What Should AMC (Theaters) Do Now?
Unlike GameStop, which initially dithered over benefitting from their huge stock price growth, AMC theaters used the huge boost in share prices to recapitalize. They paid off lots of debt, which immediately gave them runway for the rest of 2021, regardless of the pandemic-induced theatrical closures. Just this month, they sold more stock to give them additional capital to deploy. I was asked on Twitter what I would do if I were AMC theaters. Hmm. Good question.
What I Would NOT Do (but they probably will)
AMC theaters got into its terrible position in March of 2020–loads of precarious debt, but the largest chain in the industry–by buying other companies. That’s been the go-to move in the theater industry over the last two decades. The likeliest use of AMC’s new found capital will be to go out and buy many of its rivals who did not survive the pandemic. These acquisitions will give it more market power to negotiate with studios that are trying to shorten the window.
I’d advise them to be careful. Obviously some consolidation in theaters is inevitable given how many theaters didn’t survive the pandemic. And there could be great deals. But AMC should desperately avoid a mega-merger with a second, third or fourth place theater chain. (Like Cinemark or Marcus Theaters.) And especially avoid a global merger, like with Cineworld.
I’d also avoid splashy acquisitions in tangential industries. Don’t buy a company when you can’t rent their services. Making a splashy virtual reality, streaming, or gaming acquisition sounds awesome. But just as often as not, AMC will buy the wrong company. I can just imagine the headlines when AMC Theaters announces–purely hypothetically–that they’re buying RedBox and trying to justify it with some explanation about synergies and the whole value chain. Then in five years they’re writing down the entire thing. Again, I don’t hate these ideas (see below), I hate buying a company and overpaying.
I’d say don’t. Save your money.
What I Would Do
To start, the key is strategy. AMC needs a strong strategy for how to thrive. Not just competing with other theaters, but competing with streamers, live-events, concerts, gaming and more for folks time.
Thus I’d focus on the theaters themselves. Upgrade them, improve the food and drink options, and invest in the experience itself. Good strategy is having a clear vision, what is AMC’s vision of strategic excellence? My gut is it starts with theatrical filmgoing first and foremost. So use this cash to start there. Invest in the physical infrastructure and improve the experience. That’s what customers want.
Next, consider buying very small, premium chains that already do this well. Yes, I’m referring to the Arclight Theaters in particular, but there are lots of smaller chains that really do offer something unique. If AMC can buy these key chains in key locations–and I’m talking about theater buys in the dozens, not hundreds–these would make sense. (Alamo Drafthouse just emerged from bankruptcy too, with plans to expand.)
To top it off, look at expanding the theatrical experience. As I’ll write next, MoviePass never made sense as a business model, but if you are the theater chain, an expanded subscription could make sense. AMC has made some ground with their AMC A-List subscription, but how much more can they improve that?
I’d add, I’m a fan of incorporating virtual reality into the theatrical experience, since that is something most folks can’t realistically do at home. Especially VR that requires actual exploring around a space. I’d consider testing experiences like this, but without a splashy acquisition.
Update To An Old Story Update To An Old Story – MoviePass Changed Passwords
Another pet peeve of mine: news articles touting a money-losing business as “the future”.
The king example–or maybe court jester–was MoviePass. Selling $45 of movie tickets for $10 seems like an insane business model. And yet, with a sprinkle of “disruption”, a dash of “data magic” and heaps of credulity, multiple journalists repeatedly called MoviePass the future. Ignore that its model was unsustainable, it was the future…mainly because film Twitter loved it!And yet it died before I could heap my scorn on it. The news this week is that the owners of MoviePass settled with the FTC over allegations that they changed passwords on users so they couldn’t buy movie tickets. In other words, they took customers’ money, but prevented them from using their service. I’m not a lawyer, so I’m not smart enough to understand how this isn’t fraud 101. We’ll leave that to the experts. But what a great twist to this tale of disruption gone wrong.
Other Contenders for Most Important Story
The Ad-Supported Streamer Launches
This month both HBO Max and Paramount+ debuted their ad-supported streaming services. One is half off (Paramount+ drops to $5) and one is 66% as expensive (HBO Max with ads costs $10, but doesn’t have Warner Bros films day-and-date.) More than anything, this shows the power of advertising at traditional entertainment conglomerates. All the conglomerates have big teams of ad-sales folks, and they have to put them to use. Ad-supported streamers seem to be the answer.
HBO Max Puts Gives Originals a Second Window
Frankly, I love this.
The news is that some HBO Max originals, like Love Life, are coming to TBS and TNT this summer. This makes a lot of sense to me. Like the aphorism: if a film debuts on a streaming service, but a customer doesn’t know about it, did it ever really debut?
The solution is to put streaming-only titles–be they film or TV–on another window somewhere else to get those additional eyeballs. In the last decade, this meant cable titles getting a second life on Netflix, but now it is going the other way. Disney too has experimented with this, putting High School Musical: The Musical on Disney Channel earlier this year. This strategy works best for for growing streamers like HBO Max or Peacock. Speaking of…
Peacock Joins the Day-and-Date Crowd with Boss Baby 2
Just a few weeks ago, I was saying that NBC-Universal needed to stop monkeying about and devote its Universal films to streaming after theaters. As a first step, Peacock will air Boss Baby 2 the day it comes out in theaters. Now, we can only take so much from this since this is the “Covid caveat” after all, but it is a sign that Universal is going to test how its films can drive Peacock usage.
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