This is just my opinion: but I strongly suspect the Cineworld (LSE: CINE) share price will fall further. I have no idea what it’ll do over the next few days, weeks, or months, because over that short time frame any stock can go up or down regardless of the underlying value of the business. Just ask previous investors in failed outsourcer Carillion, to take one example. Or even Wirecard investors, to name another.
I’m far more confident to say that in two to three years, Cineworld’s shares will be worth even less than they are now.
The main reason why the share could fall further
My biggest concern with this share is its debt. Net debt is over £8bn. Over-indebtedness like this imposes an ever-tightening stranglehold on a business. Sometimes it can take a while for the effects to become obvious.
What’s clear to me though is that any business that fails will wipe out shareholders, as other creditors are always further up the list to get money out of the business. It also means, before that stage, that the business has to spend money on paying its debts rather than on growth initiatives. That’s not a great use of money.
Other potential pitfalls for the Cineworld share price
The whole industry is under siege from streaming. This onslaught is unlikely to abate any time soon, in my view, despite the recent hiccup in Netflix’s subscriber numbers.
In the last six years, the number of shares has more than doubled. Cineworld has had to ask shareholders for money to get through the pandemic. What that means is it will be hard to get to the same level of earnings per share as pre-pandemic without tremendous growth.
The vaccination rate may be very good in the UK, which should help leisure reopen – pingdemic aside. However, a quick reopening is far less assured than it was a few months ago. Any further closure of cinemas could have a catastrophic impact on the Cineworld share price.
Finally, a legal spat with Cineplex over an abandoned acquisition, could add further costs and distract management at a crucial time for the business.
The reasons it could do the opposite of what I predict
I can’t guarantee what will happen in the future – no one can. The Cineworld share price could rise. It may effectively get debt under control or rationalise the business, or sell off some bits. This would be the main way I see the share price recovering in a way that is sustainable.
If the leisure industry, consumer spending, and the economy all bounce back very strongly, Cineworld might get a boost as a so-called recovery stock. That’s short term though.
With Cineworld still worth around £900m, there is still a long way for it to fall, and I’ll be avoiding the shares.
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Andy Ross 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.