Cineplex (TSX:CGX) is a unique growth stock that many investors continue to struggle with. On the one hand, the stock was decimated during the pandemic when theatres were forced to remain closed. The flip side is that now that theatres are open, results are beginning to pick up. This prompts many investors to contemplate whether you should buy Cineplex in August.
Let’s try to answer that by looking at both points of view.
The case for buying Cineplex
The pandemic was brutal to Cineplex. Keep in mind that Cineplex is overly reliant on gathering people into enclosed spaces for hours while providing concessions. In fact, during the height of the pandemic, Cineplex had traffic numbers for the quarter that comprised under 10,000 patrons.
But things are improving. By way of comparison, in the most recent quarter, Cineplex welcomed back 17.8 million patrons into theatres. The quarter also saw Cineplex post its strongest results in two years. Revenue topped $349.9 million, reflecting a 438.9% improvement over the same period last year.
The company also reported a net income of $1.1 million for the quarter. This was a sharp improvement over the whopping 103.7 million net loss reported in 2021.
Also worth noting is that Cineplex has other ventures outside of its core theatre business. Cineplex also operates a successful digital media signage business, as well as the popular Rec Room entertainment venues. Both segments saw sharp improvements in the most recent quarter, and as the pandemic finally ends, the business should pick up further.
This leads to the opportunity at play for prospective investors. The stock is now trading under $10 and is down over 30% year to date, despite the recent improvement in results. In other words, Cineplex is still priced at a highly discounted rate — not reflecting its recent uptick in results.
The case to not buy Cineplex (yet, or ever)
I’ve mentioned the impact of the pandemic on Cineplex and how results should be picking up now that theatres are opening up (and hopefully staying open).
That completely ignores the fact that Cineplex had deep problems long before the onset of the COVID-19 pandemic.
In short, the movie-and-popcorn business model has remained unchanged for nearly a century, and it’s showing its age. The overreliance on Hollywood and the increased adoption of (and sheer number of) streaming providers is a major worry.
During the pandemic, when theatres were closed, studios turned to or, in many cases, built out their own streaming channels. Many of those channels had billions allocated towards creating unique, exclusive content that is never destined to appear in theatres.
In fact, a slice of that streaming business — the increasing number of exclusive series that are being released, has reignited anticipation for shows not seen in decades. This bodes well for subscriptions but does little to grow the appeal of the movie-and-popcorn business.
Oh, and speaking of prices, streamers typically charge a monthly fee for unlimited access to an entire library of content. That fee, perhaps coincidentally, is still less than the price of a single admission ticket.
Cineplex’s efforts to retain customers inside theatres (such as its VIP service, theatre rentals, and concession delivery) are admirable but not enough to counter the decline in traffic.
In a similar vein, Cineplex’s efforts outside the theatre, such as its digital media business and its Rec Room business, do promise significant growth but with a longer-term timeline.
Final thoughts: Should you buy Cineplex in August?
Every single investment carries some risk. In the case of Cineplex, that risk appears to be significantly higher than many of the other investments on the market right now. That factor alone eliminates the stock as an investment save for the most risk-averse investors.
In my opinion, there are far better growth options on the market right now with bigger upside and that are far less risky. In fact, some of those options also offer compelling dividends, too.
