It’s no surprise to see the Cineworld Group (LSE: CINE) share price slipping lower again. Since closing at 122p per share in March — its most expensive level since the stock market crash of early 2020 — the UK leisure chain has dropped 33% to current levels around 81p.
More recently, the escalating Delta variant (and what this means for Covid-19 lockdowns) has hit Cineworld’s share price. It has fed fears over the cinema operator’s ability to fill its UK theatres any time soon.
Could the market be overreacting here? After all, Cineworld sources the lion’s share of its profits from the US. And Covid-19 infection rates remain stable in this core market. Consumers could be ready to get back to regular cinema trips too, so the future may be bright for Cineworld. Is now the time to go dip-buying this share?
Why I turned my back on Cineworld
I used to own shares in Cineworld. I bought the UK leisure share back in 2018 as I thought profits could boom following its entry into the gigantic US marketplace. What’s more, the steady stream of crowd-pulling movies from the likes of Marvel, DC and Disney was on course to step up a gear or two in the early 2020s. This meant the business could expect lovers of action, fantasy and family films to keep its cinemas filled.
The Covid-19 crisis changed my view of the business, however, and I sold my Cineworld shares last autumn. The penny stock could still have a bright future as the slate of blockbusters from Hollywood studios remains strong. And don’t forget that the global box office achieved all-time highs just before the public health emergency.
But I remain extremely worried by the colossal amount of debt Cineworld carries on its balance sheet. Let’s not forget that the company was warning over its ability to continue as a going concern as recently as September. The Covid-19 crisis is far from over and further rounds of lifesaving fundraising like in late 2020 and early 2021 could be in order if its doors are forced to close again.
The huge cost of servicing its debt is also something that UK share investors like me need to consider. As is Cineworld’s ability to pay this down in a post-coronavirus environment. There remains huge uncertainty over whether moviegoers will return to cinemas en masse. Infection fears following the Covid crisis are tipped by many to linger for years to come.
What’s more, the soaring popularity of streaming services from Netflix, Disney and Amazon looks set to exacerbate the stay-at-home culture. As analysts at Hargreaves Lansdown recently commented: “there are fears some people may have got a little too comfortable watching releases from their sofas.” In the future people may not need to go out anymore to catch new releases following recent changes to the studio model that gives streamers a big boost versus the cinema operators.
It all means I don’t regret my decision to sell Cineworld shares and I’ll be looking elsewhere to top up my ISA in July.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, and Walt Disney. The Motley Fool UK has recommended Hargreaves Lansdown and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.