Are you invested in Cineplex (TSX:CGX)? Several years ago Cineplex stock was a great income-producing stock full of promise. That dividend is long gone, but the potential for Cineplex to be a great growth stock still exists.
Whether or not that potential is viable enough for investors to act on is a different story. Let’s try to answer that.
Cineplex always had problems, even before the pandemic
Cineplex’s core business operates under a business model that has remained largely unchanged in the past 100 years. That movie-and-popcorn business model is simple: a theatre charges admission to see the exclusive show and then offers to sell concessions to patrons.
Unfortunately, some of the variables in that business model have changed in the years leading up to the pandemic. Once the pandemic started, those challenges only accelerated, ultimately leading to Cineplex stock dropping to new lows.
As a start, we have the loss of the exclusivity element. Streaming services that bypass exclusive theatre showings have increased in recent years. Additionally, exclusive theatrical releases are only exclusive for 30-60 days, after which they appear on streaming platforms.
In other words, patrons not sold on that (significantly) higher price-point and experience can simply wait out that exclusive period. To put that streaming alternative into perspective, the cost of a single admission ticket is more than what a month of unlimited streaming on multiple platforms costs.
Throw in a few drinks and popcorn, and the price becomes harder to justify, particularly from inflation-wary customers.
Adding to those woes is the over-reliance on what Hollywood produces. If the quality of releases is sub-par, or if there are disruptions like we saw first during the pandemic and then during the labour stoppage, Cineplex’s bottom line suffers.
Fortunately, many of those issues are now resolved. Going into the summer blockbuster season, Hollywood is churning out better content, and patrons are returning to theatres.
But is that enough?
Cineplex is innovating and shifting its focus
Despite the headwinds that Cineplex stock continues to face, the company is doing the right thing.
Cineplex is divesting itself away (at a snail’s pace) from its over-reliance on that core movie-and-popcorn business. This includes both new initiatives as well as updating that tired business model to attract new patrons.
Inside the theatre, those efforts include premium offerings with recliners and full menu service. It also includes more immersive experiences that differentiate (and justify the price of) the big screen from the growing number of small-screen devices.
In recent years, Cineplex has even opened its concession areas to non-movie patrons, allowing the delivery of its famed movie popcorn and treats.
Outside the theatre, Cineplex has invested in multiple adjacent initiatives. This includes the company’s digital signage business as well as the Rec Room entertainment venues. Both initiatives show strong growth potential and Cineplex continues to invest in both initiatives heavily.
Turning to results, Cineplex continues to show solid improvement over its pandemic lows. In the most recent quarterly update, the company posted a net income of $5.2 million for the quarter. This reflects a huge improvement over the $30.2 million loss reported in the same period last year.
Should you invest in Cineplex stock?
No stock, even the most defensive, is without some risk. And when it comes to Cineplex, there is ample risk for prospective investors to consider.
As with all investments, that risk could also translate into higher long-term rewards if the company’s plans come to fruition. And until that happens, Cineplex stock will continue to trade at a huge discount.
As of the time of writing, Cineplex trades at just over $7. That reflects a nearly 70% drop in the past five-year period.
In my opinion, Cineplex does hold long-term growth potential, but only for those investors with long-term timelines and an appetite for risk.
