Cineworld (LSE: CINE) shares got off to a dramatic start in 2021, soaring to a shade short of 125p by March. But since then, the stock has shed almost exactly half of that valuation, standing at 62.8p as I write. Overall, the Cineworld share price is up approximately 150% over the past 12 months, so things are still fine, right?
Well, I think it’s way too soon to put the Covid-19 effect behind us, and the 70% hit that Cineworld stock has taken in the past two years. No, I think the weakness seen in the second half of 2021 is down to one key thing.
But first, yes, the pandemic is starting to recede. However, as we approach winter, cases in the UK have started to rise again. We’ve already seen the daily total creep above 50,000. And health secretary Sajid Javid has suggested infections could even reach as high as 100,000 per day.
More and more new infections are hitting younger people. Thankfully, they’re mostly the ones best able to fight it off without serious symptoms. But they’re also in the age group most likely to go see a movie, aren’t they? Still, at least cases are falling in the US… for now.
Long-term outlook
But I think there’s a more fundamental reason behind the Cineworld share price weakness. In the shorter term, investors have been preoccupied by lockdowns, cinemas being closed, and the stock falling as a result. But now we can see a bit of light at the end of the tunnel, is attention being focused once more on the long-term outlook for the cinema industry?
We’ll have new James Bond epics from time to time, released into cinemas and filling the auditoriums. But the traditional time reserved before a movie makes it to streaming is being cut ever shorter. And many online delivery services, like Netflix, are increasingly creating their own content that never goes anywhere near the big screen.
A buying opportunity now?
I have considered buying Cineworld before, but each time I felt there could be better buying opportunities in the future. So with the Cineworld share price having fallen, do I see one now?
I remain convinced there is a long-term future for the cinema business. And I can’t help feeling that Cineworld really might have turned the corner. But I have one main problem. At the moment, I have no idea what sustainable customer volumes we’re likely to see once we finally get away from the pandemic aftermath.
Cineworld share price valuation
I’m just not sure the current Cineworld valuation allows sufficient safety margin to compensate for the uncertainty and the risk.
Cineworld reported net debt of $8,435m at its latest year-end, which is around seven times the company’s market cap. With that in mind, until I see where sustained profit levels return to, I can’t think of any rational valuation.
So what do I think will happen by Christmas? I reckon there’s a good chance the Cineworld share price will pick up by then. But I fear there will be longer-term dips before I finally see it as a buy.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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