There Is No Reason For Amazon To Buy AMC Or Any Other Film Theater Chain

After inflating on Tuesday amid rumors that the movie theater chain may be acquired by Amazon AMZN +2.60%, shares of AMC AMC +4.09% included those gains on Wednesday as well. There's no doubt about the exuberance in this market, but investors should look at anything Amazon does.

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In other words, Amazon (ticker: AMZN) stock shed 0.8 percent on Tuesday, outperforming the S&P 500SPX +1.16%, though the shares are rising again on Wednesday. Despite the fact that Amazon's shareholders didn't seem to agree with the report that it was contemplating an acquisition of AMC Entertainment, investors in the distressed movie theater chain might have flung themselves into a frenzy at the news that Amazon was exploring an acquisition of AMC Entertainment (AMC).

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The logical side of a deal might seem obvious at first glance. There were multiple anonymous sources quoted in the report, which said that Amazon's takeover would offer AMC a lifeline in light of the Covid-19 pandemic, which led to a great deal of debt, as well as a new physical platform through which Amazon could market its Prime productions, cross-sell services to its customers, and collect data from them.

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AMC is a company that has been fueled by meme-fueled investors in the market, resulting in a market in which its stock is among the wildest in the world. I don't think the stock's reputation has anything to do with the fact that it makes no sense to invest in it, and although it's undeniably a powerful company, Amazon doesn't have a stellar track record when it comes to opening physical storefronts.

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Alicia Reese, a Wedbush analyst, said Tuesday in a note that Amazon is not interested in theatrical exhibitions to make money. She said Cineworld CINE +9.28% (CINE)—which went bankrupt last year—would be a better option if it were trying to secure a physical movie theater to compete against Prime productions for Hollywood awards.

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As a matter of fact, Amazon can probably cherry-pick screens for $200,000 given the bankruptcy of Cineworld. The creditors will probably take an offer like that with the 'going rate' pre-pandemic. It is not possible for [Amazon founder Jeff] Bezos's investment advisors to say, "Buy AMC for $8 billion," Reese said. “It is possible that they wish to showcase their own films, but 1,000 screens are more than enough, and 200 screens are probably all that they need.”

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Due to its $4.6 billion net debt and inflated valuation caused by the stock's meme-fueled trading since 2021, Wedbush does not view AMC as a potential acquisition target without further analysis.

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In the context of this mooted deal, it would be prudent to take a closer look at Amazon's past history of integrating physical locations into its sprawling technology business and consider how that might be related to the Amazon acquisition.

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In just over a year, the company announced that all of its brick-and-mortar stores would be closing in the U.S. and in the UK. This ended a retail venture that was known for pushing home goods, books, and toys. There was another round of similar news just a few weeks ago when Amazon announced that it would shut down some of its convenience stores that offer checkout-free shopping.

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In spite of the dramatic clampdown on expenses and widespread layoffs that have accompanied these cost-cutting measures, it could have been quite another story if physical locations had been printing their money. Additionally, it is hard to argue that Amazon's acquisition of Whole Foods in 2017 – which was its biggest-ever acquisition at $13.7 billion – was a good move.

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As part of its quarterly financial reports, Amazon reports revenue from its "physical stores," which includes Whole Foods, an upmarket supermarket that accounts for the majority of the category's revenue; although it does not break that out separately, Whole Foods remains the category's most important contributor.

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As a result of its acquisition of Whole Foods in August, Amazon reported $4.52 billion in revenue from physical stores in 2017, the first full quarter since the acquisition took place. Although Amazon still posted record sales during the last three months of 2022 in that category, it still failed to surpass $5 billion, which means that the company has seen less than 10% growth in revenue since acquiring Whole Foods in five years. This is one of the slowest growth rates that investors have seen in e-commerce, not to mention Amazon Web Services, in recent years.

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Financial statements may lend greater credence to an Amazon takeover, but they also demonstrate why this might not be a good idea.