For many, the Victoria Day weekend, and now the Memorial Day holiday in the U.S., signifies the unofficial start of the summer season. And while it may still be a tad cool to jump into the pool, it is a great time to catch a summer blockbuster at a Cineplex (TSX:CGX) location. Or is it?
Cineplex operates the largest movie theatre screen network in Canada. But the entertainment behemoth is still recovering from the long-lasting impact that the pandemic had on its bottom line. Some investors now see a big opportunity coming at Cineplex. Others are more bearish on Cineplex’s expected recovery, at least for now.
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First, let’s acknowledge that Cineplex still has some legacy issues
To be fair, Cineplex had issues prior to the volatility brought on by the pandemic. The company’s business model has remained unchanged for more than a century, and technology has finally caught up.
Specifically, I’m referring to the advent of streaming services and smart devices. This was an expected shift, but pandemic-era closures only accelerated that movement with studios releasing libraries of content, and platform-specific exclusives to subscribers.
If that’s not enough, the monthly cost of those streaming services comes in less than the price of a single movie ticket.
Cineplex has tried to address this shift with both in-theatre and outside options. In theatre, the company introduced dedicated recliner seating, revamped menus, and even in-seat menu ordering. These experience-based improvements have helped slow the bleed, but the underlying issue remains.
Outside of its core theatre business, Cineplex has invested in new verticals. This amusement & leisure segment includes both the Rec Room and Playdium entertainment venues. The media segment includes digital media arm and media advertising businesses.
Both segments are promising but will require time to grow to offset the over-reliance on the box office. By way of example, Cineplex’s theatre segment comprised a whopping $1.2 billion in revenue during fiscal 2019. During the same period, the amusement and media segments reported revenue of $257 million and $196 million, respectively.
Can Cineplex fix those long-standing issues?
The short answer is yes, but it will take considerable time to accomplish.
Looking over the past 12 trailing months, Cineplex remains down a whopping 16%. Year to date paints a different story, with the stock showing a 25% improvement. Despite those gains, the company is still down over 65% over its pre-pandemic position.
And that discount represents a unique opportunity for investors with an appetite for risk. This is particularly true given the bevy of summer blockbusters due for release soon or recently released.
That impressive list includes titles such as Guardians of the Galaxy Volume 3 and Fast X, which were released earlier this month. Over the next 30 days, other much-anticipated releases include Spider-Man: Across the Spider-Verse, The Flash, and Transformers: Rise of the Beasts.
Keep in mind, that’s just a handful of the blockbusters releasing in May and June. July, August, and September have additional promising releases that will provide a massive boost to box-office revenues.
Final thoughts
Cineplex, like most of the market, has evolved and matured since the early days of the pandemic. The pandemic exposed an existing weakness in its business model.
Thankfully, Cineplex is diversifying itself to be less reliant on the movie-and-popcorn business. All it needs is time to execute those changes.
In my opinion, there is a big opportunity coming at Cineplex for investors with an appetite for risk and longer-term horizons. Cineplex would do well as a small part of a much larger, well-diversified portfolio.
