It wouldn’t be inaccurate to claim that Cineworld (LSE: CINE) was one of the worst-affected companies by the outbreak of Covid-19. But for 2022 and beyond, could the present Cineworld share price be too cheap for me to ignore?
Possible positives
I love going to the movies and have missed doing so during the pandemic. Nothing quite compares to the sights and the sounds in a dark cinema. The reopening of cinemas, as well as a slate of long-delayed blockbuster releases, should be the shot in the arm Cineworld needs. Recent blockbuster films like Spider-Man: No Way Home and No Time To Die have helped to drive income levels above those seen before the pandemic.
Movies can generate a lot of cash. It’s not uncommon now for the big franchise releases to pull in between $500m and $1bn each, and 2022 has a lot of big releases still to come. There’s a new Marvel film, another Spider-Man, and I can’t wait to see the new Batman movie. But, despite the blockbusters released over the past few months, Cineworld’s share price has remained low. I wouldn’t be surprised if this was due to fears of more lockdowns, but those seem less likely each passing day.
Cineworld’s share price woes
So what else is holding the share price back? Cineworld’s shares were on a pretty consistent downtrend even before the pandemic. In February 2019 they were trading at 259p but fell to 181p in early 2020 before the pandemic even hit in the UK. Last year they slipped to 74.22p but have fallen even further to a low of 35.83p as I write. I certainly feel sympathy for those who bought the shares in 2018. I might be tempted by this low price alone. Warren Buffett has always stressed buying stocks when they’re cheap or ‘on sale’. But I’ll admit I’m still hesitant.
To stay afloat in the pandemic, Cineworld had to borrow billions. A business with high debt, inconsistent performance, and uncertainty ahead of it doesn’t usually see great share price performance.
The entertainment market is also very competitive. Covid-19 has accustomed many of us to lounging on our sofas and indulging in streaming services like Netflix and Disney+. As much as I love the cinema, watching films from home is much more convenient and far cheaper. The growth of these platforms may pose a long-term threat to Cineworld.
On top of that, while big-screen releases are great for cinema chains, they only get to take a share of ticket sales. A significant portion goes back to the film studio. In the case of big franchises, that can be more than 60%. In addition, competition with other cinema chains in the UK means Cineworld faces an uphill battle.
Final thoughts
I don’t think Cineworld is the investment for me. I think that with careful management the company could turn things around. But there’s so much stacked against it right now that I don’t feel comfortable adding it to my portfolio.
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
