It's too soon to say "I told you so" but that day is coming.
A version of this article originally appeared on our US site, Fool.com.
WASHINGTON, DC -- Last month, I argued that 3D cinema systems supplier RealD (NYSE: RLD.US) had become a potential winner in the making. Concerns over the cost of subsidising glasses had become overblown as a summer slate of live-action blockbusters looked to set records and pad profits.
Fast-forward three weeks. The stock is up about 20% and is still rallying on the strength of expectations for Sony's (NYSE: SNE.US) The Amazing Spider-Man, a digital feature that takes full advantage of RealD technology.
I'll get into the Spidey review in a minute. First, let's cover what's happened between my first prediction and now.
Taking a stand
On 30 May, I purchased call options with a $10 strike price expiring on 17 August for $2.57 a share. At the time, RealD common was trading for about $11.61 a share.
My thesis for this options play: buy some intrinsic value to protect against a substantial drop in price while allowing for upside if a great report and strong box-office numbers sent the stock skyrocketing toward analysts' approximate $17-per-share price target.
So far, my options position is about even -- or up sharply if you look at the "ask" price, which is $4.40 per share as of this writing. The "ask" matters, because it's the price at which sellers agree to part with their positions.
A business busting off the screen
RealD crushed stock market targets for both revenue and earnings when it reported on 31 May. And while license revenue fell year over year because of comparably poor box-office sales, an impressive performance from Lions Gate's (NYSE: LGF.US) The Hunger Games and strong early numbers from Walt Disney's (NYSE: DIS.US) billion-dollar hit, The Avengers, resulted in $570 million in box-office receipts on RealD-enabled screens through 18 May -- the first eight weeks of RealD's fiscal 2013 first quarter.
How does that compare with last year? RealD booked $724 million at the gate during the entire first quarter of fiscal 2012. Thus, with five weeks to go -- and only two weekends of gate results for The Avengers, one of the biggest 3D hits of all time -- the company had already booked 79% of last year's tally. All signs point to huge gains in licensing revenue.
Cue the Spider-Man theme music...
And yet the recent rally in RealD shares is as much about anticipation as it is past performance. The stock jumped nearly 4% on above-average volume when The Guardian posted a positive review of The Amazing Spider-Man that made reference to the RealD experience. Reviewer Andrew Pulver writes (emphasis added):
"In re-engineering [Peter] Parker into the introspective, uncertain male more typical of his previous film, [Director Mike] Webb is aided by a terrific performance from Andrew Garfield, who brings a genial unflappability that allows him to negotiate the often-ludicrous demands of the superhero plotline. At the same time, Webb also shows an unarguable facility for the more traditional action elements of the story, and the 3D certainly helps: he pulls off some properly nauseating shots as Parker dives off skyscrapers, rescues kids from falling, and the like."
Conclusion: RealD pays off when it's central to the filmmaking process, as it was here. Investors should benefit as a result.
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