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Are Cineworld shares a buy for me after its 10% drop today?

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The FTSE 250 cinema chain Cineworld (LSE: CINE) has seen its share price tank 10% today after it released its results for 2020. The Cineworld share price has now come back down to sub-£1 levels after over a month.

Clearly, investors are disappointed today. But there are plenty of arguments in Cineworld’s favour that suggest to me that this could be a good time to buy the stock. 

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Here are three of them:

#1. Cinemas reopen soon

Vaccine rollouts mean that cinemas will have a chance to reopen in the coming months in both the US and the UK, which are important geographies for Cineworld. Going by investor sensitivity to developments related to the company in the past year, I think the Cineworld share price can rally when it is back in business. In fact, as I think even more positive news flow on vaccination could be enough to get this share going right now.

#2. Positive outlook for entertainment demand

Cineworld makes two interesting observations about entertainment demand in its results update. One, in 2019, just before the pandemic, global box office hit an all-time high of $42.5bn. This indicates the extent of demand for theatrical entertainment. Two, in countries like China and Japan, where cinemas have reopened, the theatrical industry is seeing encouraging trends. 

Pent-up demand from over a year of lockdowns and even increased savings among some households in the UK, can according to Deutsche Bank economists, lead to consumers’ splurging post-lockdowns. This can further support growth in cinema demand. 

#3. Limited risk from streaming services

One risk for cinemas’ demand is competition from streaming services. The argument is similar to that in favour of online shopping, that once the consumer converts to home-deliveries, they are unlikely to return to shops in as large numbers. 

But there is another argument, which Cineworld makes in its update. It compares the difference between cinemas and streaming channels to dining out versus ordering takeaways. 

Which argument is more persuasive? I have always been a believer that cinemas and streaming services can co-exist and for that, I buy Cineworld’s reasoning.  

The risks ahead

That said, there are still risks ahead. The big one is the coronavirus itself. Covid-19 variants can still slow down progress in reopening cinemas. 

This could further impact Cineworld’s financial situation. The company has just informed that it has raised additional debt to ensure adequate liquidity going forward. It was quite big even earlier and is bigger still, now.

The takeaway for the Cineworld share

I think the risks to the Cineworld share are valid, but the opportunity for gains after reopening is big too. Even if there are not too many gains to be made immediately, I think they will start piling up over time. It is a buy for me for the long term. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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