Better to buy: AMC vs. Roku
If movie channel AMC Entertainment Holdings (AMC -1.86% ) represents the old guard of the entertainment industry, specialists in media streaming Roku ( ROKU -0.39% ) is a champion for the next generation.
Both stocks have fallen sharply in 2020. Roku’s stock is down 33% year-to-date and AMC is down 60% so far. But I think you’ll agree that only one of them looks like a good buy at these considerably lower prices.
Don’t touch this one
AMC operates the largest movie theater chain in the world, generating $5.5 billion in revenue in 2019. That massive revenue stream doesn’t generate a ton of profit, though. The company posted just $240 million in operating profit last year, leading to negative net profits and just $60 million in free cash flow.
When AMC and all other movie chains closed their screens last month, credit rating specialist Moody’s downgraded AMC’s corporate credit rating to a highly speculative B3 with a “substantial risk” rating. on the company’s senior debt securities. S&P’s valuation in early April was even more brutal, plunging the company’s corporate rating into speculative waters.
“We are waiting [AMC] theaters will remain closed beyond June due to the impact of the global coronavirus pandemic,” the ratings agency wrote. “We do not believe AMC has sufficient sources of cash to cover its cash flows. cash negatives expected after mid-summer.”
In other words, AMC was in big trouble before the coronavirus crisis and it’s only getting worse. Bargain hunters might be drawn to AMC’s lowest valuation ratios at 0.05 times trailing sales and 0.25 times AMC’s book value. These are actually huge red flags, pointing to a deeply troubled endeavor that may not last long for this world.
Here is the big winner
Roku is a very different beast. The company saw much lighter revenue last year, stopping at $1.1 billion, and Roku’s profit margins are consistently worse than AMC’s across the board. These results would be terrible for a mature, slow-growing company like AMC, but it’s exactly what investors expect from a company. high growth stock like Roku.
The coronavirus isn’t much of a threat to Roku’s meteoric revenue growth. It’s one of those businesses that really thrives when Americans stay home from work, looking for ways to waste the hours in their own living rooms. Sure, Roku benefits when people order Roku-powered TVs or set-top boxes from their favorite e-commerce provider, but that’s not the whole story. Roku also provides ad space on its media streaming platforms, so longer viewing hours should equal higher ad sales.
Media player hardware is basically sold at cost to accelerate revenue growth. Excess cash tends to flow back into the system at the moment, leading to even greater sales growth through greater marketing efforts.
The company could generate modest profits quickly by easing the pressure on these growth-boosting ideas, but that won’t happen anytime soon. You are looking at a global media giant in its formative years.
This action shouldn’t even negotiate lower on coronavirus concernsso the current Roku stock discount is a fantastic buying opportunity.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.