The coronavirus has crushed the share prices of almost all leisure-related stocks. One of the most high-profile victims has been cinema-owner Cineworld (LSE: CINE). Since mid-February, its stock has dropped a simply horrible 70% in value.
Could this be a great contrarian buy? Not in my opinion.
Steering clear of Cineworld
Cineworld was, of course, forced to close all its sites back in March in an effort to reduce the spread of Covid-19. While there’s now hope that restrictions will be lifted, things are very unlikely to return to normal soon. Indeed, the continuation of social distancing may even lead studios to postpone blockbuster releases until they can be sure of making a decent profit. They could even bypass the silver screen completely.
The huge reduction in ticket sales isn’t the only problem Cineworld has. Thanks to a questionable acquisition strategy, the company has an absolute shedload of debt on the balance sheet. Reducing this burden could prove very difficult.
What’s more, the relentless rise in the popularity of streaming services, such as Amazon Prime and Netflix, and the quality of home entertainment systems these days makes me wonder whether cinemas will ever be as popular as they once were. Why go to the trouble of travelling to a cinema and sitting among strangers when you can replicate at least some of the experience in your own living room?
Taking all this into account, I just can’t see the road ahead being anything but rough for Cineworld and its shareholders. A valuation of just 4 times earnings may be enticing but feels fairly meaningless as things stand.
For me, another part of the leisure sector looks a far safer bet, albeit at far higher valuations.
A safer alternative
A clear beneficiary of lockdown has been gaming companies. With most of us stuck indoors, it’s no wonder this activity has become one of the most popular ways of passing the time. Today’s update from publisher Frontier Developments (LSE: FDEV) only serves as confirmation.
The firm is behind four hugely popular games: Elite Dangerous, Planet Coaster, Jurassic World Evolution and, most recently, Planet Zoo.
According to the company, demand for these titles has “continued to be high” over the last month. Sales of the aforementioned Planet Zoo, for example, passed the one million mark earlier in May, despite only being available since last November.
With revenue now likely to come in above the previous range of £65-73m, Frontier now expects operating profit for 2019/20 will be “materially ahead” of the previous estimate (roughly £11m-£13m). What a difference to Cineworld’s plight!
We’ll get another update on trading on 8 June. Nevertheless, CEO David Braben is already confident the company has “a bright future post-lockdown” and that new players will continue engaging with its games.
As mentioned, the one issue with buying gaming stocks now is that most trade on (very) high valuations. Frontier’s shares were on an eye-watering P/E of 65 before this morning’s near-13% rise. As optimistic as I am on the company’s outlook, that’s too rich for me right now.
We may, or may not, get a repeat of March’s market crash. If the former, I know which of Cineworld and Frontier I’d feel more comfortable taking a stake in.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended FRONTIER DEVELOPMENTS PLC ORD 0.5P. 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.