The pandemic has decimated several industries. And one of the hardest hit is the entertainment sector. With lockdown restrictions preventing individuals from going out and enjoying various experiences, companies like Cineworld (LSE:CINE) have seen their share prices plummet as they struggle to remain afloat.
But with lockdown restrictions being eased and the vaccine rollout progressing relatively quickly, is Cineworld about to make a comeback? Let’s take a look.
The potentially bright future for the Cineworld share price
The sharp decline in Cineworld’s revenue stream was not due to a sudden lack of interest from customers. But rather from lockdowns restrictions that forced cinema doors to remain closed to the public. However, after more than a year of being stuck at home, I think it’s reasonable to say the demand to return to the big screen experience could be high. And based on recent movie performance, it seems I might be right.
In late March this year, Godzilla vs Kong vastly outperformed expectations even when an alternative streaming option was provided. More recently, the Cineworld management team released a company update that stated Peter Rabbit 2 has also beaten performance expectations and helped achieve a significant boost in concession income (popcorn, nachos, drinks and the like).
Needless to say, this is fantastic news. Today, around 97% of Cineworld’s cinemas have reopened. Combining this with the vast line-up of delayed films, the second half of 2021 could be the start of a turnaround for Cineworld and its share price. But there are still some risks to consider.
An uncertain future
The recent recovery progress made by the Cineworld management team is promising. Yet the share price has remained nearly flat on the news. In fact, since March this year, the stock has been falling. But it’s worth noting that over the last 12 months, it’s up by just over 10%. Considering the business is in a far better financial position than a couple of months ago, thanks to the income generated from new and returning customers, why is the share price still falling?
As far as I can tell, many investors are concerned about the risks the company faces today. The most prominent is an exceptionally high level of debt that surged last year as the business was forced to borrow more money to keep the lights on. 2020 also proved how susceptible the company is to lockdown restrictions. With mounting fears of a potential third-wave of Covid-19 infections, if new lockdown restrictions were to be imposed, I think the damage to Cineworld and its share price may be enormous.
The bottom line
All things considered, my views on Cineworld are essentially unchanged, even with the latest updates provided by the management team. On the surface, the business appears to be making a swift recovery. But underneath is a feeble balance sheet that might begin to crumble if Covid-19 infection levels rise again.
I feel the risk does not match the potential reward and the share price could stay weak. And therefore, I still won’t be adding the shares to my portfolio today.
Zaven Boyrazian does not own shares in Cineworld. 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.