Apple (AAPL) is one of the most tracked stocks, and one of the most analyzed companies in the world, yet a lot of people labor under a misapprehension about the very nature of the company. They think of it as an innovator, leading trends in consumer behavior, but that has not been the company’s strength over the years. Rather, where Apple has been good -- even great -- is identifying and maximizing the potential of existing trends and technology. That is not a knock on them. The commercialization of tech and consumer trends is in many ways a more valuable and important skill than innovation and they are the masters of it.
What it does mean for investors, though, is that when Apple decides to change tack on anything, we should listen. If they have identified a trend and are steering money in a new direction, they have identified an exploitable shift in consumer behavior, and history tells us that they are rarely wrong. The news this morning that they are starting to get involved in producing movies for theaters, rather than just for streaming, is significant, especially coming after Amazon's (AMZN) purchase of Metro-Goldwyn-Mayer and their stated intention of making 12-15 movies a year for theater release.
Apple is said to be devoting $1 billion to the project, and has reportedly been in talks with several production houses about partnering on upcoming films. It seems there are still a lot of details to hash out, so it is hard to see a way to play this specific project in the market, but there are ways to benefit from the observation that movie theaters are coming back.
Let’s start with what to avoid. The best-known movie stock is AMC (AMC), due to the massive volatility that has come with its status as a "meme stock," but there are good reasons to stay clear of that one. The run up to above $34 a year or so ago was spectacular, but the drop back to below $5 is more reflective of the company’s position and prospects. They used the jump in the stock in the way that they really should have, by issuing more to raise capital, but in many ways, that has just made an already shaky-looking balance sheet look worse.
They have an operating cash flow loss of around $630 million on a trailing-twelve-month basis, around the same amount of cash in hand, big annual losses on an EPS basis with no clear path to profitability, and debt of over $10 billion. If, despite that, you believe the online hype and want to buy AMC, that is your prerogative, but I won’t be putting any of my hard-earned cash into that situation.
One of AMC’s main rivals, the UK holding company Cineworld PLC, filed for bankruptcy last year, citing the lack of good movies from studios as a reason for their struggles, the same complaint that AMC has had. This news will help alleviate that issue somewhat, but it may just be too late for AMC given their precarious-looking balance sheet.
That leaves Cinemark Holdings (CNK).
They are still working their way back to profitability, but are in a better position than AMC, with positive operating cash flow and less than $4 billion is debt on the books. They have also reduced EPS losses significantly and are forecast by most analysts to swing to a profit later this year.
The news that Apple is investing in movies for theater release fits their historical business model perfectly in that they have identified a shift in consumer preference, allowed another company to move onto the space first, then followed them in. Based on past performance, their analysis of the situation will be correct and they will be good at giving the consumer what it already wants. That will obviously benefit AAPL itself, but for now movie production will still be a relatively small part of Apple as a whole, so this news doesn’t make for a convincing investing thesis for AAPL right now.
It is, however, good news for movie theaters, and by the time it starts to have an impact, CNK could be the last man standing when it comes to publicly traded stocks in the industry, making it a decent long-term buy even after this morning’s pop.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.