Yes, The Pandemic Accelerated Netflix's Path To Maturity

With shares of Netflix (NFLX) down 36% today to around $220 after reporting a net subscriber decline (ex-Russia service winddown it was a small net increase) and forecasting another decline for Q2, it makes sense to try and assess where the company is and where it might be going.

The most obvious explanation for subscriber gains being halted is the impact of the pandemic and how it pulled forward years of demand. It boils down to a simple question; if you didn’t sign up for Netflix in 2020 or 2021, will you ever? The answer would seem to be “no” anecdotally, and the numbers are now showing this to be the case. Surprising? No. Fully priced into the stock before today? Clearly not.

Here is a chart from the Wall Street Journal showing the subscriber trend:

I added the gold trend line myself to highlight that if you look at the multi-year period, you can see the subscriber trend is pretty consistent from start to finish, even though the demand pull-forward (the bars above the line starting during 2020-2021) was quite material. So NFLX subs are about where they would have been anyway, but the path was more lumpy and unpredictable, which has made for a dreadful stock performance:

We are back to 2018 levels…

The company earned about $11 per share in 2021 (and that is a GAAP number if you can believe it - good for them for not “adjusting” anything). So here we sit at 20x earnings, in-line with the S&P 500. So should we be bullish or bearish from here?

I think it solely comes down to whether you think the company is in a strong competitive position or not. If you believe that they have a loyal customer base and will be able to leverage the largest global streaming audience of any service, then the risk/reward looks quite attractive.

In that case, they should have pricing power into the future, be able to reasonably monetize the ~100 million households who don’t pay (they share passwords with the 220 million households who do), leverage their massive audience by introducing new offerings as time goes on, and make changes to their video service to respond to what others like Disney and HBO have done (e.g. release hit content week to week rather than all at once, add an advertising-supported tier for cost-conscious viewers and/or those who are password sharing).

My personal view is that the above factors are compelling in terms of stacking the deck in their favor now that they have reached the point where most everyone (at least in the developed markets) who wants to watch their stuff is watching.

But there is certainly a counter-argument, so let’s explore it. The bears will say that Apple, Amazon, and Disney can outspend them because they have highly-profitable business segments outside of streaming. So while Netflix was the first mover, that advantage is gone and their business has peaked. Over time, they would argue, Netflix will actually lose subscribers, rather than slowly climb towards the 300 million the bulls have always assumed was a matter of when, not if. If true, then there is no pricing power and content spend will increase more than revenue, which would be a big problem for the business, profitability, and the stock price.

Perhaps it’s too early to tell how loyal viewers are to Netflix. The success of a password-sharing monetization strategy will tell us a lot about that because if those 100 million viewers leave rather than pay a few bucks to keep watching, then Netflix probably isn’t a top tier streaming service. And if it’s not then growing earnings from the current $11 per share (and thus the stock price) will prove a difficult task.

I think they have a lot of levers to pull, but acknowledge that they need to do so thoughtfully and gently. Lastly, this is not a near-term turnaround story. Management doesn’t seem to have a full grasp on every issue they are facing coming out of the pandemic when running the business will get harder. So they will test things and evolve over time, as they have thus far. Still, at a $100 billion market cap, for the first time in a long while, the bar isn’t being set very high.

Full Disclosure: I bought some Netflix stock today at $230 per share

Billy Beane SPAC Inks Deal with SeatGeek

Following up on my August 5th post about a handful of SPACs, we recently heard that RedBall Acquisition Corp (RBAC) has agreed to acquire live event ticketing platform SeatGeek in a deal expected to close during Q1 of next year. There was much speculation that RBAC would wind up buying a professional sports franchise (and supposedly they did have discussions with the Boston Red Sox at one point), but I actually prefer a deal like this to one where the market would likely yawn unless an elite team was involved.

SeatGeek is one of a few next generation online ticketing platforms that not only aims to simplify the overall live event ticketing experience, but also use a mobile platform to integrate other features into the customer interaction. Reselling tickets you can no longer use and ordering concessions at your seat being two of many they are working on.

As with many SPACs this deal is full of lofty projections about revenue growth and underlying profitability in the out years. I am not going to claim their figures are easily attainable and would definitely take them with a grain of salt, but even if we discount them a fair bit, the deal does not look too expensive.

At a $10 share price, the SPAC holders will own just south of 30% of SeatGeek at closing, with an overall equity value of ~$2 billion. Given we are dealing with a software-based platform company with high gross margins, the overall price to sales ratio of 5.8x seems fair (2022 revenue projections are $345 million - this number seems plausible given we are almost into next year already… whereas the out years are likely more aggressive and uncertain).

That said, the deal is not without plenty of risk. SeatGeek is not profitable and doesn’t expect to be until 2024 at the earliest as they rapidly invest in the platform. If we assume their 2025 revenue projection of $1.2 billion is the most bullish scenario (not base line), then the stock looks cheap, but I think a lot needs to go right for them to be able to grow that quickly. Still, even at half that sales level ($600 million), a $2 billion equity value isn’t a stretch in my view.

I also like that sports people are buying this company, as they likely will be better in tune with the desires of customers than any run of the mill Silicon Valley-based software company.

RBAC stock has gone from $9.75 to the $9.90-$9.95 range on the deal announcement, so cash-alternative investors have made their money and have another few cents of risk-free upside if they choose to redeem. While I haven’t decided yet, I think I am leaning toward keeping shares in SeatGeek and seeing how the company’s growth plays out. It won’t be a large holding by any means, but there is plenty of long-term potential and I like the people behind the partnership.

Full Disclosure: Long shares of RBAC at the time of writing, but positions may change at any time

With Meme Stock AMC Staying Elevated, Let's Revisit The Numbers

I get a lot of questions on AMC Entertainment (AMC) as the meme stock crowd continues to buoy the shares despite the underlying business continuing to burn millions of cash per day, so let’s update the numbers behind the equity since my last post on the topic was seven months ago.

From a fundamental perspective, the business itself remains in the red despite being open for business, so I think continuing to value the theater chain based on 2019 actual results is a fair way of taking an optimistic view of the future (assuming normalcy eventually does return to everyday life). AMC owns fewer locations now than they did in 2019, but inflation can probably offset enough that we can safely use the $670 million of 2019 EBITDA in this exercise.

To refresh, here is what the numbers looked like back at year-end 2019, when things were (relatively) good for the company:

Cash: $265 million | Debt: $4,753 million

Share Count: 104 million | Stock Price: $7.24

Equity Value: $753 million | Enterprise Value: $5,241 million

EBITDA: $670 million | EV/EBITDA multiple: 7.8x

The stock has now moved up to above $46 while the share count has nearly quintupled. Using the 6/30/21 balance sheet (and 2019 actual EBITDA), here are the updated figures:

Cash: $1,811 million | Debt: $5,500 million

Share Count: 513 million | Stock Price: $46.09

Equity Value: $23,644 million | Enterprise Value: $27,333 million

EBITDA: $670 million | EV/EBITDA multiple: 40.8x

As you can see, the stock price today has nothing to do with fundamentals, but that statement has been echoed plenty of places. Long term, a short position here will almost certainly pay off, but the timing is the big question mark. AMC has been able to stay out of bankruptcy so far by selling more than 400 million new shares over the last 18 months. Even at their first half 2021 cash burn rate (~$3.2 million per day), they had 18 months of cash in the bank at the end of June.

Therefore, the story as we head into and traverse 2022 is where the next influx of capital comes from in order for them to roll over their debt, repay deferred rent from the pandemic (around $400 million and not included above) and get back to cash flow positive operationally. It seems like a long shot that existing creditors would be excited to dole out more funds, so additional stock sales, if allowed by the shareholder base, is the best bet for next year. If credit gets tight, however, and investors balk at buying more stock, the tide could shift pretty quickly.

Still, we don’t (and can’t) know the timing, even though the end result looks pretty obvious; the business almost certainly can’t sustain a $27 billion E/V on its own, and it likely can’t service $5.5 billion of high-cost debt either. Grab your popcorn, as the next 12 months should be very entertaining.

Full Disclosure: Short shares of AMC at the time of writing, but positions may change at any time

Reader Mailbag: Investing in the Online Gambling Market

Reader Question:

Online sports gambling has the potential to allow integrated gaming resort operators to scale their revenue dramatically beyond their physical footprint capacity. Do you see the online gambling opportunity evolving in a "winner take all" fashion or will multiple players capture a meaningful stake? Who do you think is best positioned at this early stage - established online betting companies or the integrated resort operators?

I have been amazed at the valuations being afforded to the online sports and casino betting operators in recent months. I understand that legalizing sports gambling across the country is going to expand revenue for the players in this space, as a lot of illegal bets will be moved over to legal platforms, but I think the jury is still out as to whether the ultimate profits generated from the increased revenue, and the impact on physical casino operations, will justify current valuations and expectations. Before I answer your question directly, let me share some thoughts on how investors might think about the profit potential for all of the competitors.

1) Although the “handle” (dollar value of all bets placed) of online sports betting is going to be a very large number, we need to keep in mind that very little of that trickles down to the bet taker.

The “revenue” generated from the handle (the pile of cash leftover after all winning bets are paid out) is typically a high single digit percentage of total bets taken. Out of that stack of money, each state is going to take a cut as a tax generator (this is why so many states are eager to accept bets in the first place). Some are more reasonable (Nevada takes 6.75% of revenue) than others (Pennsylvania takes a whopping 36%). And then don’t forget that casinos have operating expenses associated with sportsbooks, in the form of labor and technology.

All in all, let’s assume revenue equal to 8% of the total handle, a pre-tax operating profit margin of 50%, and a 15% average tax rate across the entire country. In that scenario, for every $1 billion of bets made, the casinos will net an all-in profit of $28 million. And they will have to pay income tax on that amount at the corporation level, which brings that figure down to about $22 million. Investors should think about that math when evaluating the public market valuations of the companies in this space.

2) If the gambling customer can whip out their phones and place bets on sports with an app, it certainly increases the odds that they will bet, but that is a double-edged sword because casinos have a lot of fixed costs and one of the ways they make money from their buildings is from ancillary revenue during an actual visit to their casino.

You visit to bet on a college football game on Saturday, but while you are there you eat at the buffet, have a few beers, and throw a few bucks on roulette during halftime. The casino winds up making more profit from that spending than they do on the actual sports bet itself. If you are betting from your couch at home, you eat your own food and drink your own beer. With a large fixed cost base, having less revenue being generated inside the four walls of your building is not the most efficient business model from an operating leverage standpoint.

Okay, so who do I think will be the winners in this space? I can easily see a handful of players taking the vast majority of the business. Penn National has dozens of physical properties scattered across the country (the most of anyone), so betters know them well. The online-only players like Draftkings and Fandual will get a lot of the folks who rarely visit casinos. That customer could also use the Fox app since they are watching on TV already. And a big chunk of the the Las Vegas business would seemingly go to MGM since they are the dominant casino operator on the strip.

So my guess would be that given the existing market positions and brands, those five would get the lionshare of the bets. How much? Hard to say, but it would not surprise me if the 80/20 rule roughly applies here.

AMC Entertainment: What A Difference WSB Makes...

Well, it hasn’t even been 2 weeks since my last post on movie theater chain AMC Entertainment (AMC), but wow have things shifted. The massive trading interest in heavily-shorted GameStop (GME) from the Reddit/wallstreetbets contingent has made every heavily shorted stock a target for massive day-trading and speculation on the long side to try and squeeze the shorts.

Given the poor fundamental outlook and balance sheet at AMC, highlighted in my prior post, it should not be surprising that the company was heavily shorted. Like GameStop, AMC faces a tough competitive environment, though the latter has far less debt (GameStop’s balance sheet means they are not faced with bankruptcy risk in 2021, in my view, but if they don’t execute well in their operations, that could change in a few years’ time).

So, what happens when the Reddit crowd gets ahold of AMC stock? Well, from January 20th when I wrote my post, the stock surged from $3 to a high north of $20 last Wednesday. Not only did the little guys and gals make money on their trades during that time, but some of the big guys/gals they hate also made out well.

Silver Lake Partners, a large, well known private equity firm held $600 million of AMC convertible debt due in 2024, which was in a dicey spot with the convert price well into the double digits. Well, they acted fast last week, converting the debt into 44 million shares of equity as the stock surged into the high teens, and selling every single share the same day the stock peaked. That’s right, they go from being one of the largest AMC worrying creditors to being completely out at nice profit in a matter of days. Note to Redditers: that’s how you ring the register!

The fact that Silver Lake saw a chance to exit and didn’t hesitate only confirms my negative view of AMC’s financial condition and business outlook. In fact, although I rarely short stocks in my personal account, I initiated a very small short position in AMC stock this morning above $17 per share. It won’t be a life changing profit even if the stock eventually winds up being a zero (I don’t make large, risky bets like the Robinhooders), but why not be opportunistic like Silver Lake?

The borrow fee on AMC was small, as the company has been issuing shares like crazy in recent weeks to try and raise more capital to stave off bankruptcy. It’s hard to pinpoint the exact figure, given all of the financial engineering going on with them right now, but as of 10/30/2020 there were about 137 million common shares outstanding (compared with about 45 million shorted last month). Add in 44 million from Silver Lake’s convert, 22 million issued to convert $100 million of debt owned by Mudrick Capital, and 228 million new shares sold into the market as prices rose, and the new share count is probably north of 400 million.

At my short price, the equity value is nearly $7 billion. Now, the debt balance has gone down some with Silver Lake converting their $600 million convertible, but that is offset by a $400 million credit facility expansion recently announced. So the debt balance is probably still around $5.5 billion. A $12.5 billion enterprise value for a company that earned EBITDA of $670 million in 2019 and has been burning cash during the pandemic due to theater closures? That’s bonkers.

All in all, while this flurry of activity and share sales may give AMC enough cash to make it to 2022, the future remains bleak and the balance sheet is still a mess. The only way out longer term appears to be a material increase in sales and profits at their theaters post-pandemic (versus pre-pandemic levels, not 2020), and that is not a bet I would be willing to make.

AMC Entertainment Moving Closer and Closer to the Brink

When it comes to playing the return to normalcy post-pandemic, there are well positioned “reopening” stocks (typically those who entered the last 12 month period with strong balance sheets) and there are those who were on a problematic path already (high debt levels and challenged business models) with Covid-19 making it much worse. Picking and choosing, therefore, becomes paramount. A great example of a company in the latter group is movie theater chain AMC Entertainment (AMC).

Below you will see what the company’s financials looked like as of year-end 2019, during the “best of times.”

Full Year 2019 Income Statement:

Total Revenue: $5,471 million

Operating Expenses : $4,801 million (excluding depreciation)

Interest on debt: $293 million

Balance Sheet as of 12/31/2019:

Cash: $265 million || Debt: $4,753 million

Common stock outstanding: 104 million shares (stock price: $7.24)

With less than $400 million of pre-tax profit annually, there was not a lot of room to both reinvest in the business (movie theaters require a decent amount of maintenance capital expenditures) and figure out how to reduce nearly $5 billion of corporate borrowings. Add in the fact that in-person movie watching is in secular decline and it wasn’t hard to understand why Wall Street was only giving the company’s equity a market value of roughly $750 million.

And then the pandemic hit. With theaters forced to close, and no new movies being produced anyway, AMC started on a path of massive red ink. For the first three quarters of 2020, the company burned through $950 million. As you can see from above, they didn’t have enough money sitting in the bank, so they borrowed more, to the tune of $1.1 billion. And the fundraising efforts continue, with another $100 million of 15% interest debt raised this week.

The writing seems to be on the wall here. With $670 million of EBITDA in 2019 and more than $5.8 billion of debt on the books now, the leverage ratio at this company (nearly 9x on a pre-pandemic operating environment) cannot continue for too long. I suspect funding sources will dry up soon, as more people realize that even with vaccines on the market, the infection rate and reopening trade will be slow, months-long events.

And even if we woke up tomorrow and it was safe to go to the movies, are people really going to have in-person movie watching at the top of their post-pandemic entertainment wish list? Have we not had enough screen time in the dark, on comfy seating, inside, for the last year? It seems like the best case scenario for AMC, which is unlikely to occur, is still not that great.

With the stock at $3 per share today (up from below $2 at the worst point), it is priced for the most likely outcome to be bankruptcy and that appears to the right, though zero would be the end result here. Whether it takes 3 months or a year or two, I don’t know. Regardless, when playing the “reopening trade” in your portfolios, be sure to discriminate and not just pick up the most beaten down, low priced stocks that have been hit hard by the pandemic.

Instead, focus on the businesses that entered 2020 with strong balance sheets, which allowed them to raise fresh funding at good prices and not overextend themselves to get to the other side. Those are the stocks that will be best positioned whenever we get back to normal.

Can Penn National Gaming Live Up To The Hype?

This post is for my buddy Zach, who asked for a Hertz article several times only to have me decline. Spending a lot of time and/or energy on the topic of amateurs day-trading the equity of bankrupt companies just didn’t interest me. For the record, though, I remain long Hertz puts. Hopefully this post makes up for it, Zach, as I dig a little deeper into Penn National, a stock you bought in March in a wonderfully timed contrarian bet provided by that nasty darn virus called covid-19.

This is not the first time I have mentioned Penn National Gaming (PENN), the biggest regional casino operator in the United States. A little over a year ago I wrote about how cheap the stock looked at $18 per share. What has happened thus far in 2020 is worth expanding on.

In late January, with PENN shares trading for $26 each (enterprise value of $5.2 billion) the company announced a deal to acquire a 36% interest in Barstool Sports at a $450 million valuation. PENN will increase its stake to 50% in 2023 on the same terms, and ultimately to 100% if it chooses (at a valuation no higher than $650 million). Barstool Sports is a digital media company with $100 million of annual revenue (2019 figure) that PENN hopes will help it ramp up its online betting platform across the country.

Investors cheered the deal and PENN shares hit $38 per share by mid-February when the stock market was reaching its pre-pandemic peak. At that point, PENN’s enterprise value had jumped by $1.25 billion just from them investing $163 million into a company that both sides agreed was worth $450 million. Unsurprisingly, I saw this as a great chance to take a profit and move on.

At the worst point in March, PENN stock hit a low of $3.75 per share as its casinos were closed due to the pandemic. That’s not a typo. To save cash PENN gave its landlord, Gaming and Leisure Properties (GLPI), the land sitting beneath its Las Vegas casino in exchange for rent credits (full disclosure: while I sold PENN, I remain long GLPI both personally and for clients). That excessive sell-off was short-lived but you might be shocked to learn that PENN stock today fetches more than $55 per share even though its facilities are operating at limited capacity due to pandemic-related restrictions:

So, what the heck is going on? The best I can tell, a couple of things. First, Barstool Sports founder David Portnoy has been live-streaming his new part-time daytrading career (twitter: @stoolepresidente) and the entertainment value has resulted in his followers gobbling up the stock on platforms like Robinhood. Second, Penn’s management team has been talking up the Barstool Sports deal with sell side analysts and many of them are jumping on the bandwagon. Last week Goldman Sachs put a $60 price target on the shares and this week Truist Financial bumped its target from $50 to $62 per share, the highest on Wall Street.

Being the old fashioned quantitative investor I am, the first thing I do is recalculate the increase in PENN’s enterprise value since the Barstool deal was announced ($4.3 billion, with PENN’s E/V now standing at $9.5 billion) and compare it with Barstool’s annual revenue ($100 million) and the valuation Mr. Portnoy agreed to sell for ($450 million). The only logical conclusion is that partnering with Barstool is not worth anywhere near $4.3 billion to PENN shareholders and that this is yet another example of the equity market bubble in “story” stocks where the elevator pitch sounds great but the numbers don’t add up.

As buddy Zach would say, “okay, so what do you do now?” Well, it depends whether numbers or hype inform your investing decisions.

As a numbers guy, I would create a set of assumptions to form an “extreme bullish case” that goes something like this: Penn got a great deal and Barstool is really worth $1 billion, not the $450M they sold it for. In addition, the online gambling venture will boost Penn’s property level profits by 20% long term. Oh, and of course the pandemic will fade and people will eat, drink, sleep, and gamble as they did in 2019 starting in 2022.

If Penn was worth $5.2 billion pre-pandemic, let’s add the 20% and then tack on another $1 billion for Barstool. Let’s even ignore the cash Penn will have to fork over to buy the rest of Barstool. We get to an enterprise value of $7.25 billion, or $39 per share. Call that an optimistic (but not completely insane) fair value estimate (and 50% above PENN’s stock price pre-deal).

The current hype, though, follows none of that math. The bulls see the stock going up and thus believe it will keep going up. The analysts don’t want to look like idiots if they miss it (Penn is a top notch gaming operator after all), so they all slap $60+ price targets and buy ratings on the stock after this huge move higher (and they were neutral when the stock was in the 20’s in 2019 and sub-$4 in March 2020). The Portnoy contingent rejoices and counts their trading profits. Even CNBC’s Jim Cramer is bullish, this morning offering no quantitative evidence despite suggesting “the stock can go a lot higher.” And so it keeps going up, two more dollars today in fact.

What would I do if I bought the stock during the pandemic-induced meltdown and woke up 5 months later to see it trading up 1,400% from the low and being pushed by the Goldman Sachs’s of the world now? You can probably guess… I would be selling into the exuberance and making sure if I stayed long any amount that it was with just the house’s money. You can surely take that advice with a grain of salt, given that I sold based on my sub-$40 fair value estimate, but riding the momentum train has never been my game. I am quite content watching from the sidelines now and collecting the dividends from my boring GLPI shares.

Be careful out there everyone, it’s crazy times.

Yes, Amazon Should Buy AMCX, not AMC.

If you were baffled by the rumors in recent days that Amazon (AMZN) had held talks about acquiring movie theater giant AMC Entertainment (AMC), you were not alone.

Putting the general strategic rationale for Amazon owning theaters aside, AMC is in serious financial trouble. Loaded with more than $5 billion of debt, the company’s meager free cash flow generation put it on thin ice even before the global pandemic. AMC booked $162 million of free cash flow cumulatively in the decade ended December 31, 2019. The company’s interest expense in 2019 alone was $293 million and they recently added $500 million of high cost debt (10.5% per year) just to stay solvent through the rest of the year.

The idea that Amazon would be dumb enough to make a buyout offer (which would need to top the debt load in dollar terms simply for the equity holders to get anything) during this pandemic is questionable reporting, at best. Given that movie production is shut down, there will be a big delay in new releases even after theaters reopen and consumers get comfortable visiting them. It sure seems like the pandemic is only going to accelerate AMC’s path to bankruptcy, and as a result, Amazon should just wait it out and try to buy the assets during the court proceedings.

Late Tuesday there was a spike in shares of AMC Networks (AMCX), on unconfirmed reports that the content production and distribution company was running a sale process, and that Amazon was actually kicking the tires on that company, not the similarly named theater chain. That rumor makes sense and it was actually nearly 2 years ago that I suggested the combination in an article for Seeking Alpha (Amazon.com Should Buy AMC Networks To Beef Up Content Business). Full Disclosure: I own shares of AMCX personally and for clients, and recently added to the position around $25 per share.

While publicly traded, AMC Networks is controlled by the Dolan family, who have shown a willingness to sell when it makes sense and the price is right. That latter point may be a tricky issue. AMCX brought in free cash flow of $6.60 per share in 2019 but the shares trade in the 20’s, which highlights the reason going private or selling the business makes sense.

As long as AMCX gets a lot of revenue from cable television advertising and distribution fees, Wall Street is likely to continue painting it with the “cord-cutting” brush and mark the stock at a discount to intrinsic value. That discount has only gotten deeper lately, but the Dolans are not dumb; the company bought back $86 million worth of stock during Q1 despite the pandemic and continued buying into April. There aren’t many companies executing buyback programs right now but AMCX’s financial condition is rock solid.

AMCX generates a ton of cash and despite lower ad revenue this year, projected on their Q1 call that free cash flow in 2020 is expected to be above 2019 levels of $377 million. Paused production is helping offset lost revenue and say what you will about the cable business, but per-subscriber fees keep rolling in.

Wall Street is also not paying attention to AMCX’s move into streaming, likely due to the fact that it is a drop in the bucket compared to Netflix or Disney+. Still, AMCX just pushed up the timetable for its goal of 3.5-4.0 million streaming subscribers (across multiple platforms: Acorn, Shudder, Sundance, UMC). Due mostly to the pandemic, the company expects to hit that level by year-end 2020, versus prior expectations of year-end 2022.

If we value those subs similarly to Netflix’s current valuation (AMCX will make a profit on them , whereas Netflix is still losing money), and adjust for the delta in monthly cost (AMCX’s plans run $5-$6 per month), AMCX’s streaming business alone would be worth $1.2-$2.0 billion by the end of the year. Not bad for a company with a current equity market value of $1.5 billion.

The Amazon rumor continues to make perfect strategic sense. They clearly want to beef up their Prime Video offering to compete with Netflix and Disney+ and adding shows like The Walking Dead and Better Call Saul would only help that. Toss in a few million streaming subs, whose plans are already sold on the Prime Video platform, and AMCX instantly bulks up Amazon’s content library and media executive team. Heck, having AMCX CEO Josh Sapan take over the entire Prime Video operation would be a wise move too.

All in all, I am glad there is some speculation that Amazon is kicking the tires on AMCX. I hope that it is not getting more press than it deserves simply because the AMC (no X) rumor didn’t make sense given their precarious balance sheet. If Amazon is willing to pay a fair price, I think the Dolans would sell. As a shareholder in AMCX, it is frustrating to see the public markets mark the stock at such a big discount to any reasonable estimate of intrinsic value.

So what is a reasonable price? It’s a great question, obviously. And a fascinating one given that Amazon likely doesn't want to pay a big premium, even if it is justified on paper. They played hardball negotiating with Whole Foods Market years ago.

This type of deal reminds me of Discovery’s purchase of Scripps a couple years back. Scripps was also heavy into cable, with its ownership of networks like HGTV and Food Network. Still, they were able to get their shareholders a big premium and a decent price of 12x free cash flow and 10x EV/EBITDA. Not sky high prices, but levels that shareholders could live with since the public market was not going to give it to them anymore.

I certainly think that AMCX is worth a similar price on paper, which would come out to at least $80 per share. They won’t get that. Cord cutting has gotten worse in the last 2 years, we have a pandemic right now, and digital video platforms are only getting more competitive. Still, if I were the Dolans I would probably not sell for less than 10x free cash flow or 7.5x EV/EBITDA; which equates to $60-$65 per share.

As you can see, the recent price in the 20’s is kind of silly, but investors are simply uninterested in owning this stock regardless of the profit the business churns out year after year and the streaming products they are building. Hopefully Mr. Bezos will take us out of our misery. If not, we will just wait for the cash flow to come through and fund stock buybacks at insanely cheap prices (having peaked at 74 million in 2014, the share count is now down to 54 million).

Plenty of Travel-Related Stocks Ripe for Bargain Hunting with Multi-Year Outlook

I find it interesting that the financial community is making much about the various drug companies working on coronavirus vaccines. History suggests that 90-180 days from now the outbreak will be off the radar and the global economy will be bouncing back. I am not sure a SARS vaccine, for instance, has much financial value these days. These strands of virus tend to have one-off impacts.

Much like during the SARS outbreak, or after the 9/11 attacks, travel stocks are taking it on the chin right now. As a long-term contrarian investor, I cannot help but allocate some existing cash balances into these stocks. 2020 will be a throwaway year from a financial perspective and the markets should relatively quickly refocus on 2021 and a more normalized operating environment.

Does it matter which companies one targets? In many cases, probably not. Having already held Expedia (EXPE), and being only more excited after hearing Barry Diller’s plan to reinvigorate the company’s business, I can’t help but be elated that the post-earnings rally we saw earlier in the month has now been given back completely. I am modeling $10 of free cash flow per share in 2021 (assuming a normalized economy) and the stock is fetching $105. Plug in your expected multiple of FCF and calculate the upside accordingly.

Booking Holdings (BKNG) has more international exposure and reports after the bell today. At $1,675 and about $100 of per-share free cash flow, that one is worth watching as well.

I have also been looking at the cruiseline sector and already had global market leader Carnival (CCL) on my watchlist pre-virus due to a depressed stock price (due to a large capex cycle depressing free cash flow generation). I have begun accumulating shares, as the single digit P/E ratio and dividend yield north of 5% (payout ratio of less than 50% on normalized earnings) appear favorable to historical levels.

To be clear, I am not predicting how bad coronavirus will be, or when travel-related stocks will bottom. Instead, I am taking my normal 2-3 year (minimum) holding period assumption and making a bet that buying high quality travel companies during times of near-term distress will pay off over the long-term. History suggests it will.

As Bidding Surges for TV Reruns, Content Is Still King, Despite Wall Street's Collective Shrug

With media companies like Comcast, Apple, and Disney quickly mapping out their answers to Netflix and Prime Video the prices being paid for rights to stream old television programming are surging. In recent weeks HBO paid $425M for the global rights to stream Friends and another $500M for The Big Bang Theory. After losing The Office to NBC (again, $500M), Netflix offered the same $500M for Seinfeld and "won."

We can question how much hit shows are really worth in this context, as it is essentially impossible for a streaming service or cable channel to pinpoint the ROI for a single series. But one thing is certain; prices for content are strong and getting stronger. With per-episode production costs for new shows now crossing into the ten figures in some cases (whereas $1-$2M used to be considered expensive), it is often cheaper (and less risky) to go with a known quantity and buy rerun rights.

A logical reaction on Wall Street, in the face of such prices being paid, would be for content owners to see their share prices catching a bid. But as has been the case lately, logical moves are being shrugged off and content company stocks have done nothing. Investors would rather focus on money-losing, fast-growing tech companies like Uber, or real estate companies trying to get tech-like valuations (WeWork).

While frustrating for value-oriented investors, it is important to keep in mind that low prices allow these companies to gobble up and retire cheap shares, boosting our stakes with no incremental investment from us. Since popular video content brings in a lot of cash (whether it be from resale agreements, advertising, or affiliate fees) no matter Wall Street's near-term sentiment levels, longer term things will shake out in our favor.

Companies like AMC Networks and Discovery will continue to grow free cash flow by creating great content, and stock buybacks below intrinsic value will result in per-share profit growing faster than in absolute terms. Since 2015, AMCX's share count has been cut from 73M to 57M and total revenue is up 20%. DISCK's share count peaked at 858M in 2010 before falling to just 576M in 2017 (M&A activity has boosted the figure above 700M today but buybacks are just now restarting) as revenue nearly doubled.

Even more impressive, these financial metrics have improved during a time that streaming services and cord cutters were supposed to have killed these businesses. Since 2011, Netflix's streaming subscriber base has grown from 20M to 60M in the U.S. alone but outside content producers are still doing well, in part by licensing their shows to streaming providers.

The more Wall Street ignores the prices being paid for content, in an ever-increasingly competitive streaming landscape, the more value the companies will be able to create for their investors over the long term. The fact that such an opportunity exists is odd, given the high profile attention large streaming rights deals are getting, but the stock market in recent years seems to be myopic, focusing on revenue growth and collectively shrugging at the real cash cows. Let the stock buybacks continue!

Full Disclosure: The author is long shares of AMCX and DISCK, both personally and on behalf of clients, at the time of writing, but positions may change at any time