Stock Analysis & Ideas

Cinemark Needs More than Top Gun to Bolster a Declining Industry

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Although Cinemark is surprisingly one of the few public companies that are up in the year so far, CNK stock will likely struggle in the long run as dependency on major blockbusters is an expensive proposition.

From a cursory look, cineplex operator Cinemark (CNK) seemingly poses as a viable bullish target. With the debut of Top Gun: Maverick – a film that has broken multiple records – driving people back into the box office in droves, CNK stock could enjoy a revival. Nonetheless, too much damage may have been inflicted on the underlying industry, making it a questionable investment. I am bearish on CNK.

Based on the concept of immediacy bias, it’s understandable why many investors are willing to give Cinemark a chance. For one thing, it’s not just Top Gun that has market participants excited about a return to Hollywood’s golden age – that is, the period before streaming services took over the entertainment landscape.

With highly anticipated titles like Avatar 2 and Black Panther: Wakanda Forever about to be released, moviegoers have no shortage of compelling films to watch. Further, the two-year period of COVID-19-related restrictions has made many people stir crazy. Essentially, a night out at the movies represents a social experience that was denied throughout much of the global health crisis.

However, on the other side of the equation, attendance levels are still shy of pre-pandemic comparisons. With the box office struggling to make up for the catastrophic loss of business in 2020, CNK stock faces a daunting uphill battle.

CNK Stock Remains Financially Challenged

To be fair, the release of Top Gun: Maverick has done wonders for CNK stock and the broader cineplex industry. According to data from Box Office Mojo, as of August 1, 2022, the blockbuster has generated $650.3 million in domestic ticket sales and $671.6 million internationally, for a worldwide sales tally of $1.32 billion. Nevertheless, investors need to consider the longer-term trajectory and realize that CNK remains financially challenged.

Frankly, the moviegoing consumer base is a fickle beast. Sometimes, Hollywood production studios get it right, and other times, they don’t. Therefore, it’s too soon to assume that one film will fundamentally change the narrative for CNK stock.

Stated differently, the company suffered a heavy blow from the COVID-19 pandemic. True, Cinemark’s 2021 revenue haul of $1.51 billion represented a 120% lift over 2020’s result. In addition, in the first quarter of this year, the $461 million in sales quadrupled the comparable period’s total.

Still, when stacked up against pre-pandemic norms, Cinemark’s recent sales aren’t that impressive. For example, if one were to take Q4 2021’s holiday-driven sales total of $667 million and extrapolate it for the year, the subsequent tally of $2.67 billion would be lower than the revenue for 2017.

Lack of Diversity Increases Risks for Hollywood

While Hollywood in recent years has focused on increasing representation and promoting underprivileged voices, the irony here is that the movie industry lacks content diversity. It’s no longer feasible for production studios to focus on the art of filmmaking. Instead, they must concentrate almost exclusively on the business component.

Back in 2000, the top 10 grossing films at the domestic box office featured a wide range of genres. From action movies to comedies to even a biopic of American activist Erin Brockovich, the consumer ecosystem at the time facilitated content diversity. Since people were willing to pay for art, Hollywood studios gave moviegoers exactly what they wanted.

Fast forward to 2019, and the situation changed dramatically. Here, the top 10 grossing films mostly featured science fiction or comic-book-related films. Stated differently, if Hollywood wants to compete in the modern entertainment arena, it must pump out costly summer blockbusters.

Unfortunately, there’s no guarantee that spending millions of dollars will equate to box office success. When movies bomb, they can render substantial damage to their financial backers, meaning that production studios will be very careful about their exposure.

Over time, that’s not a great narrative for CNK stock.

Wall Street’s Take on CNK

Turning to Wall Street, CNK stock has a Strong Buy consensus rating based on four Buys assigned in the past three months. The average Cinemark price target is $24.50, implying 30% upside potential.

Takeaway – There are Better Opportunities Elsewhere

While the hype train over heavily anticipated films is enticing, from an investment perspective, it might not do much for CNK stock. Unless Hollywood can consistently churn out billion-dollar blockbusters, Cinemark’s revenue prospects appear uninspiring. Further, the nature of the box office has changed, presenting longer-term challenges for the cineplex operator. Thus, I believe there are better opportunities elsewhere.


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