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Is Cineworld stock a good investment right now?

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Taking a quick look at Cineworld‘s (LSE: CINE) share price lately, it’s been pretty volatile. Its stock performance took a nosedive last year when the pandemic began. Now it’s trading at 94p, up an impressive 74% from 54p a year ago. However, this is still 25% off its 52-week high of 125p, set back in March.

As a value investor, this recent dip has attracted my attention. I’m always looking for cheap shares that can diversify my portfolio, but I need to understand first if this is a stock I should avoid.

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Looking at Cineworld’s financials

I’m not blind to the fact that Covid-19 has left an already beleaguered cinema industry in an even worse position. This hard year was reflected in Cineworld’s 2020 performance. 

Revenue for 2020 declined 80.6% to $852m from $4.3bn in 2019. The company also had to issue more debt to survive this period. Some $810m of new debt was raised, putting net debt at over $4.3bn.

However, having soared above 100p in the last few months, I believe that its current price is a more realistic entry point. 

Share price potential

Cineworld’s debt raise should keep it afloat long enough to see the reopening of cinemas. The company recently opened its locations in the US, where it makes around three-quarters of its sales. Although these cinemas are limited to two-thirds capacity, they’ve started to bring in some much-needed revenue for the group.

For example, over the Easter weekend, the firm benefited from the launch of Godzilla vs Kong. The blockbuster raked in $32.2m in the US over its three-day opening weekend. In my opinion, this proves that bums will also return to seats when the UK reopens cinemas on 17 May.

I also think that if Cineworld can survive the onslaught of Covid-19, it will be able to pick up and grow. Some other cinema chains may not survive, and the movie industry desperately needs to sell tickets again. Cineworld could mop up the market share left behind by the closure of competitors. 

Risks to Cineworld’s share price

Obviously, the cinema sector is a massively risky investment. Even prior to the pandemic, Cineworld shares were not setting the world alight. In fact, before their March 2020 drop (when they sat at 182p), Cineworld’s share price was already 44% off its 2017 all-time highs of 325p. This is because cinema attendance around the world has been declining for years as streaming has taken centre stage. 

That brings me to the big unknown of whether there’s actually enough interest in cinemas to keep the industry alive post-Covid. We know there’s some interest, but will cinemas ever return to their heyday attendance levels, and will Cineworld shares keep rising? 

I’m not sure.

So, is it a buy?

I believe there’s too much risk to justify me investing in any cinema stock right now, let alone Cineworld.

I could be wrong, and the easing of pandemic restrictions in the US and UK could see Cineworld return to life from this summer onward. But with the taking of market share by online streaming services such as Netflix and Disney during lockdown, I’m unsure as to whether any summer boost will really be enough.

Ultimately, I just feel that the negatives far outweigh the positives when it comes to Cineworld stock.

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Jamie Adams owns no share 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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