What’s Next for the Silver Screen

Wedbush Entertainment Analyst, Alicia Reese says of movie theaters, “Movie theaters were a mature, low-growth industry pre-pandemic. Investment was made based on expected market share gains, dividends, and/or international expansion.”

We take a look at what’s next for this industry as theaters reopen and bring new movies to the silver screen.

Market Value for Movie Theater Companies

The pandemic hit movie theater stocks hard as they were forced to close most locations, and at best show films with very limited seating. Even when theaters were open attendance was sparse amid fears of contracting COVID-19.

AMC (ticker AMC) stock’s high over the past three years was just over $21 reached in mid-September of 2018. It’s intraday low over the past year was just under $2 per share. The shares recently traded around $13 per share, representing a significant gain since the end of 2020.

IMAX (ticker IMAX) another major player in this space saw its high over the past three years reach about $26 in mid-September of 2018 as well. The stock hit lows around $9 per share in late March of 2020 as news of the pandemic hit the financial markets. The stock hit a high of about $24.50 per share this year and recently closed around $21 per share.

How the Industry has Responded

Reese notes, “The rise of streaming and correlated cord-cutting has not directly impacted theatrical box office, as many of the same streamers also go to the movies. There’s more content available now, and content-lovers are just consuming more.”

She adds, “Many studies have been published over the last few years on the correlation of streamers and movie-goers – the more hours streamed monthly, the more a given person is likely to go to the movie theatre. Another cohort who did not go to the movies before have picked up streaming in exchange for cable-viewing.”

Reese goes on to say, “While we think the domestic exhibitors under our coverage have done an excellent job with sanitization and general safety during COVID, concerns remained for many, and the lack of prime studio content kept many away. In the meantime, studios have had the opportunity to test day-and-date releases with virtual impunity. WarnerMedia continues to hold to its strategy of releasing its content day-and-date with HBOMax throughout 2021, going back to a traditional exclusive theatrical window in 2022.”

She also commented that, “Universal’s agreements with AMC and Cinemark provide for a shortened theatrical window, presumably trading lower film rent for the reduced window and the high likelihood that blockbusters will remain in theatres much longer. Cinemark has now reached an agreement with all of the major studios, with a different approach that works for each partnership. Stated simply, this means that Cinemark won’t boycott any films, and will get some benefit from any reduced windows.”

In short, the pandemic has increased the need for movie theaters to improvise in the face of uncertain demand plus the ongoing competition from streaming services and other outlets.

Potential for Return of Demand as COVID Restrictions are Rolled Back

This is the key question for the industry and certainly for investors. Reese says, “We have not seen any studies that show a meaningful shift from the movie theatre to streaming at home only. However, many investors harbor concerns that the pandemic has forced this shift or maybe accelerated the already-occurring shift.”

She adds, “We still think that Gen Z, especially those under 21, will go to the movies with friends versus staying at home to watch. Dates at any age, especially first dates post-pandemic, will not occur at home – people will want to get out of the house. As long as there is good content exclusively shown for a time in theatres or at a reasonable price vs. as PVOD at home, people will go.”

What These Trends Mean for Investors

Movie theater stocks may be a solid post-COVID play in some cases. Wedbush research analyst, Michael Pachter doubled his per share price target for AMC in early March. Even with his increased price target for the stock, Pachter kept his rating for the stock at neutral citing concerns about the company’s debt burden as having a potential dampening effect on the stock even in the wake of the expected post pandemic bump from the reopening of theaters.

Reese recently upgraded the firm’s outlook for IMAX stock from neutral to outperform. She cited the pent-up demand in Japan, China and elsewhere in Asia having driven an increase in the company’s market share there. She expects similar results as Europe and North America reopen in the coming months.

Much will depend upon how well the public responds to the reopening of theaters and the ability of the various theater companies to bring their revenues back to or above pre-pandemic levels. Many of these companies also have significant debt on their balance sheets and this will be a factor in their ability to thrive and prosper going forward.

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