The first quarter was a tough one for the movie industry. The winners and losers from this may or may not surprise you. But the question for us as investors is: Are any of these stocks worth “buying the dip” in this bear market?
Comparing January 1 through March 19 of this year to the first quarter of 2019, domestic sales dropped 25% to $1.81 billion, versus the $2.41 billion in 2019. On March 19, revenue fell a whopping 97% year-over-year to a record low of $300,000, compared to revenue of $11 million that day in 2019.
Talk about a major blockbuster miss!
The revenue decline isn’t too surprising, as the major movie theatre companies – AMC Entertainment Holdings, Inc. (AMC), Regal Entertainment Group and Cinemark Holdings, Inc. (CNK) – have all temporarily closed their doors following the coronavirus pandemic. AMC management expects its 630 theatres to stay shutdown for up to 12 weeks.
Now, let’s focus on AMC for a moment. It’s dominated the industry, with more than 1,000 theatres worldwide, but it’s been on a steep decline for a while. Yes, in the fourth quarter of 2019 AMC’s revenue rose 2.4%, versus a 1.6% decline for U.S. industry box office revenues as a whole. Fourth-quarter earnings of $0.35 per share also topped estimates of $0.08. So, AMC posted a whopping 337.50% earnings surprise.
These numbers alone sound fantastic. But when you take a step back, the picture isn’t so pretty. The reality is the company has been on a downward trend since posting a disappointing first quarter last year. Attendance, revenue and earnings all fell. And the earnings losses were wider than expected.
Year to date, the stock is down 57%. And, looking forward, I expect the next earnings report to be a real horror show. According to Adam Aron, the CEO of AMC, the company isn’t seeing a “penny of revenue.” So, earnings and revenue are going to take a big hit in the coming quarter.
Now, if you’ve been following AMC in Portfolio Grader, then you would’ve known to stay far away from this stock well before the coronavirus hit.
As you can see above, the stock earns an F-rating, making it a “Strong Sell.” The fundamentals are weak, with sales growth lackluster and operating margins shrinking. This tells me that demand is dwindling, which is never good for a company trying to grow. And to top it off, AMC holds an F-rating for its Quantitative Grade. This isn’t surprising, seeing as how the stock went from $16 to $3 in just the past year.
The truth of the matter is, even before the coronavirus hit, folks just weren’t as interested in going out to the movies. AMC as well as other theatre chain companies were well aware of this, as they’ve been busy upgrading their theatres and food to create a better in-theatre experience. Now there’s an uphill climb to recoup that cost, let alone turn a profit.
Netflix (NFLX), on the other hand, is growing. For the fourth quarter, the company reported earnings of $1.30 per share. This was significantly above analysts’ expectations for $0.53, so the company posted a whopping 145.30% earnings surprise. Revenue of $5.47 billion also topped estimates for $5.45 billion. For the first quarter, the analyst community is looking for a 114.5% year-over-year increase to $1.63 earnings per share, compared to earnings of $0.76 in the prior year.
While Netflix management expects to add 7 million paid customers for the first quarter, it’s likely the company will exceed that. Analyst Michael Olson of Piper Sandler believes that Netflix subscribers in the U.S. and Canada could increase 3.8% year-over-year, versus consensus for 1.6%. Imperial Capital analyst David Miller expects the company to add 7.5 million subscribers for the first quarter. Clearly, Netflix is set to benefit from the “stay-at-home” orders, as folks don’t have many more entertainment options than their television.
So, it’s no surprise that NFLX earns a B-rating in Portfolio Grader.
As you can see, the company’s sales and earnings are growing and its operating margins are expanding. So, there’s strong demand for the stock. In addition to healthy fundamentals, the company earns a B-rating for its Quantitative Grade. Clearly, institutional investors are interested and see potential here.
Now, while Netflix receives an overall B-rating, I’m not much interested in it right now. The truth of the matter is there are plenty of other streaming companies fighting for market share, and we’re not going to be stuck in our homes forever. So, I’m focusing on the bigger picture. And that picture is 5G.
Netflix is sure to benefit from 5G. People will be able to download 2-hour movies in 3.6 seconds. With 4G, you’re looking at six minutes. There’s no doubt that 5G will take Netflix to the next level. And that’s true of many, many other companies and industry groups.
So, it’s no surprise that the major U.S. carriers – Verizon, Sprint, AT&T and T-Mobile – are racing to win the 5G game. After all, 5G-capable smartphones are expected to increase 5 times from 10% in 2020 to 56% in 2023. And with 5G comes higher-priced smartphones and cell phone plans.
However, not a single carrier can get past the starting line without the right infrastructure to build the 5G network on. There’s one company that is well-positioned for this growth within the infrastructure. I like to call it the Netflix of 5G. For all the details on this company, as well as access to my special 5G report, click here.
Note: Outside of 5G, I did make an all-new recommendation for Growth Investor this month. Once I see the signals I’m looking for – earnings reports (and how stocks respond), analyst news, and a decline in coronavirus cases – there could be a lot more where that came from.
In the big picture, my broader themes remain intact. That includes the 5G wireless revolution, which is just starting to come into its full potential. Go here for my free briefing and secure your copy of my 5G investing guides.