Since peaking in mid-March at 122p, Cineworld (LSE: CINE) shares have lost 50% of their value. It was expected that the Cineworld share price would boom as lockdowns eased, however, this doesn’t seem to have been been the case. There are a few reasons why this dip could be a good buying opportunity for my portfolio, but there are still long-term risks ahead of the UK multiplex cinema chain.
Cineworld shares were hammered by the pandemic. With multiple UK lockdowns, the cinema industry ground to a halt. The 2021 half-year results highlight the continued strain on the firm. Revenue came in at just $293m with a loss before tax of $659m. In addition to this, monthly cash burn was around $45m. Net debt also increased by $81m, reaching $4.6bn.
Another problem the pandemic brought to the fore is the dominance of streaming services such as Netflix and Amazon Prime. As my fellow Fool Gemma Blackwell pointed out, film viewing is now twice as likely on one of these platforms as it is in a traditional cinema. Moving forward, Cineworld will need to find ways to overcome this competition if it wants to stay afloat in the market.
Cineworld shares: bull case
That being said, there are a number of reasons I think Cineworld shares could rise in the shorter term. As we continue to move out of the pandemic, it’s likely that customer demand will pick up again. In fact, Cineworld has already reported attendance figures reaching 50% of pre-pandemic levels. I expect this demand to continue picking up throughout the remainder of 2021.
Another factor driving demand is the line-up of new releases Cineworld has coming up. This is due to a Covid-related backlog of new films from franchises such as The Matrix and James Bond. With many of these films being released exclusively to Cineworld, this sets it aside from online streaming services.
The firm has also been able to effectively rebuild its balance sheet having secured an additional $213m in liquidity. This liquidity will be issued in addition to over $800m secured during the pandemic. While this increases long-term liabilities, it allows the firm to more quickly recover from the virus’s impacts. I expect this to help Cineworld shares in the short term.
Cineworld has a long way to go before I would consider adding its shares to my portfolio. The excessive financial strain on the firm won’t be permanently lifted by a temporary increase in demand. In addition to this, I don’t think Cineworld will be able to compete with online giants Netflix and Amazon much longer. Although liquidity help is good in the short term, it only places more strain on Cineworld in the long run.
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Dylan Hood has no position in any of the shares mentioned in this article. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. The Motley Fool UK 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.