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Why Last Week’s News Is Terrible for Cineplex (TSX:CGX) Stock

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The cinema has faced an existential threat in the form of the COVID-19 pandemic. While Cineplex (TSX:CGX) and its top international peers have largely managed to stave off bankruptcy in 2020, the long-term damage of this year may deal permanent damage to the industry. In late November, I’d discussed Cineplex’s big surge, as vaccine news propped up many struggling sectors. Unfortunately, that bout of optimism has proved fleeting. News from last week is very troubling for Cineplex and the future of the movie theatre business around the world.

A recent move by Warner Bros. is bad news for Cineplex

Last week, Warner Bros. announced that its entire 2021 film slate would immediately be streamed on HBO Max. This streaming service, powered by its parent company AT&T, was launched in late May. The announcement means that a total of 17 Warner Bros. films will simultaneously be released in movie theatres and on HBO Max. This has sent shock waves through the industry. Cineplex stock dropped 7% week over week as of close on December 8.

Film director Christopher Nolan, behind blockbuster hits like The Dark Knight, Inception, and The Dark Knight Rises, scolded HBO Max for the move. Nolan gambled big on the release of his most recent effort, Tenet, in the summer of 2020. It managed to pull in nearly $360 million in global box office revenues. However, with a massive budget of $205 million his bet was seen as a cautionary tale. Nolan blasted Warner Bros. for the planned streaming release, saying the decision makes “no economic sense.”

The big fear for Cineplex and its peers is that this is just the beginning.

Will more production companies and streaming services follow?

In late October, I’d discussed the second delay for the forthcoming James Bond release No Time to Die. At the time, there were reports that Netflix and other top streaming platforms had approached MGM over global distribution rights. I’d discussed why this would be a devastating near and long-term development for movie theatres.

Over the past two decades, the cinema has grown increasingly reliant on blockbusters. This new phenomenon led to the domination of Disney-led studios like Marvel. The reliance on this business model may prove to be the downfall of the cinema industry as we know it. If streaming platforms gobble up new releases, it will represent a huge turn for cinemas and the movie industry at large.

The move by Warner Bros. has the potential to break the dam that has been held by the traditional cinema. Is there any reason to put faith in Cineplex stock in this environment?

Cineplex stock: Is there any reason to take the gamble?

As it stands today, Cineplex is facing an industry in turmoil, and the stock does not even offer income to shareholders. The release of vaccines will pave the way for a return to normalcy in 2021, but this crisis has caused irreparable damage to the traditional cinema. There is no reason to scoop up Cineplex stock considering the risks right now.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Netflix and Walt Disney. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short January 2021 $135 calls on Walt Disney.

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