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Cineworld’s (LON:CINE) share price has surged 50% higher year-to-date, as investors have looked ahead to a reopening of its sites following Covid-related lockdowns. In the US, around 97% of its cinemas are now open, while in the UK its estate enjoyed a strong opening weekend following the recent easing of lockdown measures.

Short-term potential

In the short run, the company’s shares could experience further upward momentum. The novelty of the return of leisure activities, such as visiting the cinema, may lead to increasing footfall in the coming months. Indeed, the firm highlighted in its latest results that countries such as Australia and China had enjoyed a resurgence in cinemagoers following the ending of their lockdown measures. This could set a precedent for the near-term performance of its own sites.

Record levels of savings amassed by consumers during recent lockdowns may provide the financial means to visit the company’s locations. Meanwhile, upcoming major film releases such as James Bond’s No Time To Die, The Matrix 4 and the latest Fast & Furious episode could act as major draws for film-lovers.


Long-term challenges

However, the company’s medium and long-term prospects remain extremely unclear. Lockdown measures may be easing, but there are no guarantees that further containment measures will be avoided in Cineworld’s main markets of the US, UK, Poland and Israel. Covid-19 variants may prompt higher transmission rates that leave policymakers with little choice but to place fresh restrictions on the leisure sector. This would be likely to cause a severe financial impact for the firm — even though its recent update stated that it has secured sufficient liquidity to last until the end of the 2021 calendar year.

Furthermore, the pandemic has caused a sudden and significant shift in consumer behaviour. The popularity of streaming services such as Netflix and Amazon Prime has soared. For example, Netflix subscriber numbers increased by 36 million in 2020 to reach in excess of 200 million worldwide. Their services act as a substitute for attending cinema venues. This could mean that a sizeable proportion of previous cinemagoers fail to attend Cineworld’s sites to the same extent post-Covid compared to before its occurrence.

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In addition, streaming services are becoming increasingly dominant in the film industry via their acquisitions of major studios. The latest activity in this area is Amazon’s $8.45 billion acquisition of MGM, which owns the James Bond franchise as well as many other popular titles. This could make it increasingly difficult for cinema chains such as Cineworld to differentiate themselves from streaming services, since they may no longer be able to rely on deals with studios that allow them to screen new releases before anyone else.

Margin of safety

The prospects for Cineworld’s share price are extremely uncertain. Its performance largely depends on the outcome of ‘known unknowns’, such as the future path of the pandemic, the popularity of streaming services versus cinemas, and whether those streaming services will increasingly dominate the wider film industry through acquisitions.

Therefore, following its recent share price rise, it may fail to offer a worthwhile risk/reward investing opportunity. The stock market may have already factored in a positive outlook that leaves investors with little margin of safety in case of further challenges ahead.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Robert Stephens

Robert Stephens

Robert Stephens is a CFA Charterholder who has around 15 years’ experience working in the financial services industry.

The vast majority of that time has been spent working as an Equity Analyst, with a focus on FTSE 350 shares in the consumer goods, consumer services and retail sectors.

He has also contributed to a wide variety of media publications on a freelance basis, including The Telegraph, What Investment, Master Investor and Citywire.

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