Over the past year, the Cineworld (LSE:CINE) share price has fallen 93% — with it down 80% in just the past week. From a 12-month high of 84.8p, it currently trades at 2.75p. Now I have to factor in all the news out in recent days to decide whether Cineworld shares would be a Foolish (capital F!) purchase for my long-term investing portfolio or not.
Reason for the sudden drop
I think it’s fair to say that most people were aware that the business has been struggling since the start of the pandemic. Lockdowns prevented people from going to the cinema. Even when the firm’s locations reopened, many were cautious about going back into a room full of strangers.
Delays to major blockbuster films and the rise of streaming services online over the past couple of years have also been blows for Cineworld. In order to survive and deal with the cash burn rate, more debt has been taken on the books.
Unfortunately, this culminated with confirmation that the business is considering a Chapter 11 bankruptcy filing in the US. This type of legal proceeding is used when the company wants to continue to operate but need time to get its finances in order.
So even though this technically means business as usual for the moment, it’s a definite red flag to many investors, hence the sharp fall in the share price.
Should I buy Cineworld shares now?
Given the size of the move lower, there’s always a part of me that wonders if the stock’s oversold by fearful investors. In the case of Cineworld, the business is clearly going to go through a further aggressive restructure. It could even be the case that a private equity company buys it out due to the low valuation and restructures it that way.
Whatever the case may be, I can only see more pain in coming months. The $424m in new debt raised in 2021 adds to the existing pile, taking the total to around $5bn. A trading update from last week spoke of how “recent admission levels have been below expectations”. A cocktail of lower revenue and increased costs is never a good mix.
As a long-term investor, I’m also unsure whether this is a smart play. Let’s say that the business has some kind of miracle that keeps it ticking over for another year or more. Even in that case, I don’t think that the next decade holds good news for traditional cinemas. I believe that the rise of services such as Disney+ and Netflix (along with associated studio productions), is the future.
I could be wrong in my view. Bar the news of the Chapter 11 filing, nothing has intrinsically changed with the business from last month. There’s always a chance that it can be turned around in an orderly manner. If this happens, then the potential jump in the share price could be large.
But overall, I think it’s just too high-risk an idea for me to consider buying the stock now. Even with my long-term investing hat on, I just don’t see the how Cineworld can get back to the old days.
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Jon Smith has no position in any of the shares 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.