The Cineworld (LSE: CINE) share price has fallen to 64p from a year-high of 122p in mid-March. This is still a 60% rise over the past 12 months. It hit 87p on 8 July, before falling to 56p on 19 July, and was at 64p yesterday afternoon. I dislike this level of volatility, but in this case there is a decent explanation.
The Cineworld share price
First, the current 64p share price is still 80% lower than Cineworld’s high of 324p in 2017. This demonstrates that there is massive potential for growth. In 2018, it acquired US-based Regal Cinemas for $3.6bn. In 2019, it attempted a $2.1bn takeover of Canada’s largest cinema chain, Cineplex Entertainment, though this plan was ended by the pandemic. In fact, things were looking rosy for Cineworld right up to the stock market dip in March 2020.
Then it experienced disaster. Global cinema attendance dropped over 70% in 2020 compared to 2019. The good news is that cinemas globally are starting to reopen. However, I think Cineworld has long-term problems that will make a share price recovery difficult. To start with, it has a net debt pile of over $8bn, against a current market value of less than £1bn. Today, it announced it had borrowed a further $200m to help with “financial and operational flexibility.” This is not a positive sign.
If the coronavirus situation deteriorates again, the chain could collapse from lack of sales. I think the Cineworld share price volatility is because it is closely tied to consumer confidence. Its ability to pay back its debt and return to profitability depends on whether the worst of the pandemic is over.
The other big risk to Cineworld is streaming. I’ve written recently about why the release of Black Widow on Disney+ could pose a threat to cinemas. However, star Scarlett Johansson is suing Disney for its dual release for $50m, so it might be worth waiting to see how that lawsuit ends before thinking about whether Disney stock could be worth buying for me.
What about Netflix?
I’d consider buying Netflix (NASDAQ: NFLX) shares instead. Its share price has risen through the pandemic to $519 yesterday, though recent Q2 earnings led to a share price fall. However, sales jumped 19% year-over-year to $7.3bn, and earning were $2.97 per share, up 138% from $1.59 in the same quarter last year. It added 1.5m new users, and predicts a further 3.5m in the third quarter. This is partly because the company expects consumers to sign up to watch new seasons of delayed popular content such as Stranger Things and The Witcher. It has also announced plans to launch into gaming in the near future.
There are risks though. With a market cap of over $220bn, some analysts think it has little room left to grow. Competitors Disney and Amazon are chipping away, with Netflix losing 430,000 North American subscribers in Q2. Consumers may soon resort back to piracy rather than pay for multiple services. There is also concern over screen sharing damaging potential subscriber growth.
However, as an investor with a long-term view, I think that Netflix has the finances and leadership required to meet these challenges. The company is still growing. It could be better value for me than the Cineworld share price.
Charles Archer owns shares of Netflix. 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.