Taking a quick look at Cineworld’s (LSE: CINE) share price lately, things aren’t looking good. Long before the Covid-19 pandemic, this British cinema leader was in decline. As of 19 May, it is trading at around 85p, down almost 15% from 98p a month ago.
However, in the past 12 months, the Cineworld stock price has risen 50% from 57p. I’m always looking for cheap shares that can diversify my portfolio. Is Cineworld actually on the rise as Britain reopens, or is it too risky for my portfolio?
A quick glance at Cineworld’s financial situation
Let’s be honest, the cinema industry did not need Covid-19 to put it in a bad position. The sector was already in decline, and the pandemic simply worsened a bad situation. This was reflected in Cineworld’s poor 2020 performance.
Last year, revenue plunged 80.6% to £852m from £4.3bn in 2019, while losses mounted to a whopping £2.2bn. To keep itself from going completely under, some £810m of new debt was raised. More debt has since been raised, bringing its total to around £6bn.
Cineworld’s share price potential
It’s tough to talk about potential when I see a debt pile that big. The one saving grace that Cineworld has right now is that its UK branches reopened today, 19 May. Having already reopened many of its locations in the US last month, this ‘homecoming’ could go a long way towards recovery.
Following the success of films such as Godzilla vs Kong in the US, similar expectations have been placed in the UK. Investors will be hoping that pent-up demand for moviegoing after more than a year in lockdown will see plenty of bums on seats.
It is also my belief that Cineworld could enjoy a Darwinian post-pandemic survival. While many cinema chains will not survive this pandemic, Cineworld could mop up the market share left behind by these closures.
My concerns about Cineworld’s share price
There are already rumours circulating of the increased severity of the Indian Covid variant. We have already seen in cities such as Glasgow that Cineworld has been prevented from reopening over fears of rising cases. This situation could swiftly escalate, causing more cinemas to close once again.
And even with a reopening, success wouldn’t be guaranteed. Before its March 2020 drop (when it sat at 182p), Cineworld’s share price was already 44% off its 2017 all-time highs of 325p. Streaming has been disrupting the cinema industry for years.
Even returning to profitability may not be enough for Cineworld to pay off its debt faster than interest accrues at such enormous amounts.
So, should I invest in Cineworld?
There is a reason that Cineworld is such a heavily shorted stock — so few investors believe it can stage a comeback. I don’t hold out much hope for the cinema industry as a whole, or Cineworld. With such massive debt as well as the looming threat of more lockdowns, it’s a no from me.
