Figure 1: Amazon Is Investing in Movie Theater Releases – And That Could Be Very Bullish News For AMC Stock
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Tech behemoth Amazon (AMZN) - Get Free Report is expected to invest about $1 billion a year in film production and releases, Bloomberg has reported. AMC Entertainment (AMC) - Get Free Report shares traded up nearly 5% on the bullish news. Other publicly traded theater companies saw similar moves.
According to the Bloomberg report, Amazon will produce a small number of movies in 2023 as it builds experience within the film production and release niche. This marks the first time that a major streaming player has opted to make a big push toward in-theater releases.
Amazon's move into theatrical film releases, however, should not be seen as coming totally out of left field. Early this year, the company released two episodes of its Rings of Power series in theaters. And in 2017, the Amazon-produced rom-com “The Big Sick” was also released in theaters - to much audience and critical acclaim.
Amazon has also been investing in original content through its streaming unit, Prime Video. In 2021 alone, Amazon spent about $13 billion on video and music streaming services. In 2020, its investment was $11 billion.
In 2021, Amazon also purchased production giant MGM for $8.45 billion. That meant Amazon acquired MGM’s extensive film collection, bolstering its Prime offerings, but it also deepened Amazon’s bench of human capital and expertise within the production industry.
Amazon’s management, then, has made its intentions of delving deeper into the media industry clear. The company envisions an ecosystem that integrates Prime subscriptions with e-commerce and the company's other products.
With movie theaters regaining popularity as the Covid pandemic fades away, and with competitiveness within the streaming industry only accelerating, Amazon’s foray into theatrical releases offers it another potentially lucrative avenue to grow its media segment.
There are several challenges that the movie theater industry needs to overcome in the short term to return to pre-pandemic levels. But, as pointed out by AMC’s CEO Adam Aron, AMC’s business will be affected, first and foremost, by the number of popular movies released theatrically.
"At this point, there is only one topic that should be on the top of all minds and the tip of all tongues. It's not the coronavirus, it's not streaming, it's not windows. It is this: movie theater operators need more movies."
The Covid pandemic had a profound impact not only on the operation of movie theaters but also on film production, which experienced significant delays throughout 2020 and 2021. Major studios, for example, have dropped their production rates by 20% to 30% compared to pre-pandemic levels.
Although optimism is returning to the movie theater industry, progress is being made slowly. For the year 2023, a stronger box office is anticipated, with movie production rates finally returning to “normal” levels.
With the news that Amazon will be jumping into the production fray, many analysts are even more confident in their positive box office predictions for next year.
And according to AMC CEO Adam Aron, when demand normalizes, AMC will be very prepared. The company has been actively investing in infrastructure. It has worked on renovating its existing screens and increasing the number of IMAX, Dolby Cinema, Prime, and iSense screens in AMC theaters.
While Amazon's likely investment in theatrical releases is long-term bullish for the movie industry as a whole, AMC shareholders and traders may benefit from this news in the short term. That's because of the volatile nature of AMC stock.
The movie theater operator has been the target of massive short interest. Recent data indicated that about half a billion worth of AMC shares were being shorted - this comprises about 20% of AMC’s float.
Currently, high short-selling demand has been reflected in sky-high borrow fees for AMC shares.
AMC borrow rates reached over 100% in early November. This coincided with a 50% rally in AMC shares - the product of both positive earnings results and broad market euphoria amid weakening inflation.
The latest data shows that AMC borrows fees are still extremely high, at 38% annualized. That’s well over 10x the normal borrow rate for shorting stocks (generally between 0.3% and 3%, annualized).
Figure 2: AMC's borrwed rates.
Stocksera, data by Interactive Brokers
Therefore, since the beginning of November, shorting AMC has become almost prohibitively expensive. The setup for a short squeeze is just about perfect. All that’s missing is a sharp upward movement driven by buying volume - which even a mild catalyst, such as the recent Amazon news, may trigger.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)
Co-producer of The Street’s financial channels: Apple Maven, Amazon Maven and Wall Street Memes. Researcher and operations manager at DM Martins Research.
