Cineplex (TSX:CGX) should be a name that is known to both seasoned and new investors. Cineplex is the largest entertainment company in Canada and the largest movie theatre screen operator. But does this unique factor alone make Cineplex a great investment option? Let’s try to look at whether investors should buy Cineplex now or wait.
The case to buy Cineplex
Cineplex, like all movie theatre companies, is very reliant on the quality of content being churned out from Hollywood. During the pandemic, there was a drought of content, and what little content was being released was often sent directly to streamers.
Fast forward to today, and we’re in a unique position. Not only is it the middle of the summer, but more importantly, it’s the middle of the all-important summer blockbuster season.
And this is turning out to be one of the better summer blockbuster seasons in recent memory. By way of example, during the 2022 summer season, the two biggest releases of the summer were Top Gun: Maverick and Doctor Strange in the Multiverse of Madness. Those two films have grossed well over US$1 billion at the box office.
In 2023, the two biggest movies (so far) are Spider-Man Across the Spider-Verse and Guardians of the Galaxy Vol. 3. And while those two films have grossed just over US$730 million at the box office, they were both early summer releases.
In other words, the biggest releases of the year still aren’t in the top three yet. This means that Cineplex can expect a notable bump in earnings during the next quarter and beyond.
And perhaps best of all, Cineplex still trades at very discounted levels, despite rising 11% in 2023. As of the time of writing, Cineplex trades at just under $9. Over the trailing 12 months, the stock registered a 16% drop.
In short, investors with longer timelines may want to consider buying Cineplex, while it’s still down for the eventual long-term recovery.
The case not to buy Cineplex (at least not yet)
A Cineplex recovery will eventually happen, but it’s not going to happen tomorrow. And during that waiting period, prospective investors are losing out on what could be stellar opportunities elsewhere on the market.
But, more importantly, let’s not forget about Cineplex’s underlying issues, which stem deeper than the post-pandemic recovery.
Prior to the pandemic, Cineplex was witnessing a reduction in traffic to its theatres. This was fueled by the rise in popularity of streaming platforms. When theatres were shuttered during the pandemic, this served as a catalyst for the larger studios to release their own streaming platforms.
Those studios then poured billions into content production, often focusing on content exclusively for their respective platforms. The result is a library of thousands of entertainment options for subscribers to watch that carries a monthly cost that is less than a single admission ticket.
That’s a hard act to follow, especially in an environment of rising prices where consumers are trying to slash costs. And that’s not all.
Adding to those woes is the potential loss in concession revenue. Cineplex attempted to offset some of that loss by offering concession delivery services, which, along with preferred VIP seating, were not getting to the core issue.
Cineplex’s business model has remained largely unchanged for over a century. It charges admission to shows and then offers concessions for sale. And while that model may still work, it’s Cineplex’s over-reliance on that model which is worrying.
To be fair, Cineplex has been diversifying outside of its core business. The company has invested heavily in its popular Rec Room venues and runs a growing digital media and ad business.
But given the market volatility and other options on the market, it might be better for investors to look elsewhere.
Final thoughts
No stock is without risk. And while Cineplex is evolving outside of its core movie-and-popcorn business, the company remains a higher-risk investment, at least for the moment.
So, then, should you buy Cineplex? In my opinion, unless you have a very long-term timeline and a large appetite for risk, there are far better investments to consider right now.
