By intuition, the narrative undergirding advanced film projector specialist Imax (NYSE:IMAX) appears exceptionally risky. With consumer sentiment weakening and recession risks rising, it’s easy to dismiss the narrowly-relevant enterprise. To be completely fair, the business model does present downside threats. At the same time, analysts remain bullish on IMAX stock. In my humble opinion, it’s for a good reason.
Before diving into the positive catalysts for IMAX stock, prospective investors must recognize the dangers of this market idea. At the top, the Federal Reserve runs the unenviable task of reversing prior monetary excesses. While its most recent 50-basis-point rate hike represented a slowdown from the typical 75-basis-point hike, it still represented a signal of intent. Essentially, the central bank will continue implementing its hawkish monetary policy.
Naturally, the associated rise in borrowing costs doesn’t augur well for growth-centric investments, including IMAX stock. From a broader perspective, though, the Fed’s monetary tightening sparked mass layoffs, particularly in the technology sector. However, recent distributions of pink slips suggest that other segments – including the financial sector – share the pain.
For IMAX stock, the logical deduction of a weakened consumer base doesn’t help matters. With fewer people with high-paying jobs, it’s a major ask for them to pay for premium movie tickets. Indeed, Imax-powered films do charge more than your typical early afternoon matinee.
Nevertheless, the sharp jump in 2020 in recreational vehicle stocks – think Winnebago Industries (NYSE:WGO) or Camping World (NYSE:CWH) – demonstrates that even under economic and social duress, Americans place a premium on entertainment. Fundamentally, then, the reason for analysts’ optimism for IMAX stock centers on the cheap entertainment thesis.
Out of eight total experts, the worst individual rating for Imax is a Hold. That’s likely very meaningful.
IMAX Stock Benefits from Social Normalization Trends
Aside from delivering relatively cheap escapism, Imax stands poised to benefit from social normalization trends. In particular, the recent thawing in tensions between the Chinese government’s deeply unpopular zero-COVID policy and the public poses good tidings. With a top player in the global consumer economy brought back to life, IMAX stock appears discounted.
A case in point is the latest blockbuster film, Avatar: The Way of Water. Domestically, the release might sound like a disappointing denouement. While it opened with a box-office debut totaling $134 million, this tally slipped below expectations. It’s not a death sentence. However, with the associated production costs, insiders hoped for more.
However, on the international front, the Avatar sequel hauled in what Variety called a “dazzling” $301 million. Even here, though, some disappointments rang out. Specifically, China opened with $57.1 million. However, industry analysts hoped for an upside target of $100 million.
Nevertheless, prospective buyers of IMAX stock should read the fine print: COVID flareups and subsequent theater closures contributed to lackluster attendance. Still, the point stands that artificial headwinds negatively influenced box office receipts. Take that out of the equation, and the picture likely brightens considerably.
Therefore, this dynamic represents another reason why analysts rate IMAX stock so highly. Sure, the underlying industry faces troubles. At the same time, these troubles – at least for the China box office, it seems – represent the light coming out of the tunnel. Put another way, Chinese moviegoers are likely not moving into a tunnel.
Effectively, to use market jargon, most of the bad news may have been priced into IMAX stock. Therefore, investors may look forward to upside from here on out.
Is IMAX Stock a Buy, According to Analysts?
Turning to Wall Street, IMAX stock has a Strong Buy consensus rating based on seven Buys, one Hold, and zero Sell ratings. The average IMAX price target is $20.13, implying 42.9% upside potential.
Anticipate the Financials of the Future
Without a doubt, if an investor looked at the financials undergirding IMAX stock without any context, the situation would appear unpleasant. For instance, Imax’s net margins on a trailing-12-month basis dipped into negative territory. So too, did its three-year revenue growth rate (on a per-share basis). However, it’s critical to appreciate the company’s forward-looking financials.
While it’s impossible to know with absolute certainty what the future may hold, with the likely reincorporation of China’s box office into the global tally, IMAX stock down the line will almost surely look better than it does right now. For instance, the negative growth and profits should swing positively.
During rough times, people look for escapism as a temporary relief from their troubles. While exotic vacations may be off the cards because of economic woes and escalated prices, the movies offer an excellent value proposition, pound-for-pound. For a little bit more, people can enjoy an immersive experience via Imax, the kind which Avatar was made to see in.
Plus, here’s something to bite on now. Despite the troubles, Imax features a gross margin of 55.1%, beating out over 71% of the competition. Once social conditions fully normalize, this top-level margin affords Imax pricing flexibility. That’s going to be critical as economic circumstances could fluctuate in 2023. It’s also yet another reason why analysts appreciate IMAX stock.
