Cineplex Inc.: Why the Box Office Pains Are Just the Beginning

Why a bottom may not be in for Cineplex Inc. (TSX:CGX) yet.

| More on:

Over the past few years, the box office segment has accounted for less of total revenues for Cineplex Inc. (TSX:CGX). It’s clear that the company plans to continue its move away from the traditional movie-and-popcorn business and into new entertainment areas, but this dilution of the core business is a process that will take many years. Contrarian investors looking for a sharp rebound may need to look elsewhere if quick gains are what they’re after, since the pains are likely to continue over the medium term.

You’re probably well aware that video streaming platforms are a huge problem for the movie theatre industry. These streamers are going to compete with one another for subscribers, resulting in upped content budgets and the rise of hit straight-to-stream movies.

These straight-to-stream films aren’t the “low-budget” productions that you’d typically expect with the “straight-to-VHS” releases back in the old days either. Bright, a film that went straight to Netflix Inc. (NASDAQ:NFLX) with a reported cost of ~$90 million, isn’t exactly what you’d call a low-budget movie. Given Netflix’s commitment to the production of original content, even bigger budget “blockbusters” may be skipping theatres over the next few years, leaving Cineplex and other theatres out in the cold.

Why would major movie studios choose to skip theatrical releases?

I don’t know if you’ve noticed, but many extremely high-budget films have been surprising duds over the past year. And it’s not because the movies stunk, either! This was one of the major reasons why I urged investors to sell Cineplex last year before shares took a massive plunge.

Consider Valerian and the City of a Thousand Planets or Blade Runner 2049, two major sci-fi films with estimated budgets north of ~$150 million. I went to see each film on their respective opening weekend at my local Cineplex, and I was shocked to see that the turnout was ridiculously small. The turnout was less than you’d expect from an indie production or a limited theatrical release of a National Live Theatre play.

As it turned out, both films ended up underwhelming in North America. The critics loved Blade Runner 2049 as well with its respectable 87% rating on Rotten Tomatoes, so the weaker-than-expected turnout was not due to quality. It just goes to show how rapidly consumer preferences are changing in the “stay-at-home economy.”

Fellow Fool contributor Will Ashworth is used to the “boom-and-bust” nature of the theatre industry and doesn’t think the industry’s secular decline is anything to panic about. Bad years of box office duds have happened in the past, after all. As soon as better content is released in theatres, moviegoers will return, right?

I’m less optimistic, especially when you consider how uneconomical it’s become for studios to continue along the path of theatrical releases.

Consider Paramount’s recent decision to sell its international film rights for Annihilation to Netflix. The film has a huge star in Natalie Portman and received very positive reviews from critics; however, Paramount chose to skip theatres altogether when it came to markets outside North America and China.

If moviegoers don’t go to theatres, studios are just going to assume the worst from a theatrical release, and eventually, studios won’t even bother with theatres. They’ll just sell rights to Netflix or some other streamer from the get-go. That means Cineplex will miss out on its cut, and studios will have more incentive to produce low-budget straight-to-stream films to turn out a better profit.

So, it’s not necessarily bad content that’s killing Cineplex; it appears that major studios are exploring more economical options as the industry continues to evolve. Annihilation had a solid 85% on Rotten Tomatoes but clocked in a very underwhelming $11 million on its opening weekend. Investors have to be asking themselves why such studios would bother risking their capital on a high-budget production when a low-budget streamer would have been a low-risk way to command a fatter profit margin.

It seems like only Walt Disney Co. (NYSE:DIS) movies are able to blow it away at the box office these days. So, unless other studios have a superhero movie of their own or some other family-friendly production, streaming may be the preferred release option in the future, unless Cineplex is willing to take a hit to its box office margins.

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of Walt Disney. David Gardner owns shares of Netflix and Walt Disney. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix and Walt Disney. Walt Disney is a recommendations of Stock Advisor Canada.

More on Investing

Canada day banner background design of flag
Investing

Got $500? 5 Top Canadian Stocks to Buy and Hold

These top Canadian stocks have solid fundamentals with potential to outperform the benchmark index by a wide margin.

Read more »

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

ETF stands for Exchange Traded Fund
Investing

Here’s the Average TFSA Balance at Age 54 in Canada

Here are two ways to optimize your TFSA for either growth or income via ETFs.

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »