Cineplex (TSX:CGX) is the stock that can’t seem to catch a break. The management team has been terrific, but to no avail, as the company just found itself on the wrong side of a profound technological movement.
The company’s diversification efforts have kept the stock’s head above water, but as the movie theatre industry continues to fall into secular decline, I suspect that Cineplex, whose stock has already shed 56% of its value from peak to trough, could stand to halve again over the next two years.
In a prior piece, I noted that just because a stock has fallen by 50% doesn’t mean that it can’t halve again. So, those enticed by Cineplex’s dividend, which currently yields 7.12%, and apparent cheapness in shares based on historical multiples should remain vigilant, as betting on the wrong side of a secular trend is a dangerous endeavour.
While I’m bullish on Cineplex’s entertainment and amusements segment, the box office segment will be the biggest contributor to earnings for the next few years, so Cineplex is really still at the mercy of the Hollywood box office in spite of its big strides with Rec Room, eSports, and its Playdium rollout on the horizon.
So, back to theatrical movies. They’re dying because content producers are being snatched up by video streamers who are going after the Netflix “king of the living room” throne.
In a previous piece entitled “Why 2019 May Be the Worst Year Yet for Cineplex,” I highlighted that the content drought would be permanent and that Cineplex would be a casualty of a content arms race.
“I think this is just the beginning of a fierce battle for content producers, and as the streaming market becomes that much crowded next year, Cineplex will probably have tumbleweeds rolling around its once lively theatres. Sadly, the company may have no choice but to cut its dividend next year, as it doubles down on its diversification efforts — the only thing that will allow Cineplex stock to see the light of day again.” I said this November, reaffirming my negative view of the stock.
To make matters worse, Netflix, the author of Cineplex’s pain, is attempting to up the ante with its “gamification of video content” with Black Mirror: Bandersnatch, the first fully-fledged choose-your-own-adventure movie to exist. The film reportedly has over five hours of footage and could be seen as the future of how viewed content is delivered to consumers. If that’s the case, the choose-your-own-adventure genre of film could be the final nail to the coffin of old-fashioned movie theatres.
While the choose-your-own-adventure style of film is undoubtedly experimental with a massive production investment relative to a linear film, the payoff could also be astronomical. Netflix is clearly doubling down on a new style of film and should it show promise, I expect Cineplex to drop like a stone because, for obvious reasons, a pick-your-own-adventure won’t work in a theatre, unless of course there’s some sort of on-the-fly polling done, which probably wouldn’t make sense given that the audience would need to take out their cell phones in the middle of a film.
Foolish takeaway on Cineplex
I wouldn’t touch Cineplex stock with a barge pole in the new year. There are far too many headwinds on the horizon to warrant the rich 19.7 trailing P/E multiple. When you factor in the potential 2019 content drought and more enticing streaming options that’ll exist in the year ahead, I think Cineplex has nowhere to go but down.
Stay hungry. Stay Foolish.
