IMAX Corporation (IMAX) shares have faltered somewhat over the past year, lagging the broad momentum of the S&P 500. We do not believe the recent underperformance of the stock reflects the state of affairs or the progress the company is making as it seeks to penetrate new movie-going markets. IMAX is constantly focused on growing its international footprint, and is now testing the waters on expansion into the home theater market. So, at this stage in the high-tech theater exhibitor’s growth story, should investor’s be overly concerned about the recent downward stock movement? Is IMAX subject to the same seasonal risks as its competitors? Does the share-price dip lend itself to wide long-term appreciation potential? Which types of investors are best suited for the company’s stock? In this article, we will attempt to address these questions by taking a brief look at IMAX’s business and performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
IMAX screens have been around for over 40 years, but the corporation it is today began twenty years ago, when its stock went public on the New York Stock Exchange and the company actively turned its focus to mainstream film exhibition. The company has two principle businesses: designing and manufacturing theaters and digitally re-mastering feature films into the IMAX format. It has come a long way since its early days, when it was almost exclusively a company that developed big screen experiences for museums and universities. While its museum clientele still exists, the bulk of IMAX’s success is derived from its commercial theater business. Launched in 2002, the larger-than-life theater format has taken off in recent years, dually due to the proliferation of blockbuster films and the consumer desire for a reason to pay extra to see a movie in theaters. Ostensibly, IMAX sells The IMAX Experience, being the concept that viewing a feature through its proprietary visual and audio technologies is the premiere way to watch a film.
IMAX has grown its brand from a film exhibitor at museum theaters into a global box office stamp of approval. It envisions itself to be the leader in entertainment, technology, and distribution. Through these three aspects, IMAX is able to attract interest from all phases of the film pipeline, as both film studios and theater exhibitors have long jockeyed for expanded IMAX offerings. The Canadian company, to its credit, is highly selective, with an impressive track record to boot. As it grows in size and scope, IMAX will need to exhibit the same discipline that got it to this point or risk diluting its brand equity.
The company’s premiere brand recognition and best-in-class reputation is directly linked to IMAX’s proprietary projection and audio technologies, as well as its digital film equipment. The company’s larger-than-life theater experiences are unique, and typically make up for a disproportionately large share of a film’s box office haul. The company’s technology, in other words, justifies the premium price for its tickets. Additionally, should the company want to move into other markets, the strength of its technological offerings will likely give it a leg up on competition.
Reliance on Big Customers
IMAX relies heavily on several major movie exhibitors to support its top-line growth. China-based international theater exhibitor AMC/Wanda, the world’s largest theater exhibitor, accounts for an outsized portion of the company’s sales. Should the Chinese company develop their own large screen format and cannibalize its IMAX footprint before or after their 12-year agreement expires, IMAX would take a sizable hit. The company needs to be careful then, as it strives to break more ground in more nations, to not overexpose itself to one or two exhibitors in exchange for quicker foreign market penetration.
The seasonality of movie-going audiences can have a direct impact on quarterly results. The strength of summer blockbusters, the broadly appealing winter releases, and other holiday offerings make up the bulk of any given year’s cumulative box office. On top of this, the creative output of movie studios is unpredictable and subject to a plethora of interests, which often hurts the box office tally. Thus, IMAX is forced to rely on a handful of films every season to support its growth and achieve its vision for financial improvement. One flop, though, and the company’s guidance is thrown for a loop.
The company has identified 1,700 foreign markets where demand is strong for IMAX’s products. Management estimates that it has only penetrated roughly half of these regions. Many of the foreign regions where the company is looking to move into have budding middle classes with a burgeoning demand for a big-screen experience. These audiences prefer going to the theaters to see an American blockbuster or a local franchise picture. IMAX, for its part, instills regional loyalty in new markets by offering local films, like India’s Dhoom or Russia’s Stalingrad. Both of those films quickly became the largest grossing films in their respective nations, largely on the strength of IMAX’s promotion and name-brand recognition.
It appears the next frontier for IMAX is the living room. While it already made strides in developing home theaters via a joint venture in China, these strides are exclusively for higher-end customers who can afford the exorbitant $250,000 price tag. We think a move into the television and sound system market is an undeniably lucrative opportunity, but comes rife with risks. For one, the market is highly competitive and evolving, and comprised of many companies much larger than IMAX. Working in the company’s favor, of course, is its name and its reputation for cutting-edge technological offerings on its screens and in its speakers.
The success of IMAX has begat a slew of competing brands, mostly from movie exhibitors and theater operators. Regal Entertainment Group recently introduced its RPX, a super-sized screen experience marketed as a technologically superior way to watch a movie. While these new ventures have a long way to go before catching up to IMAX technologically or in terms of brand, big exhibitors like Regal and Cinemark (which offers XD, in addition to IMAX) have vast theater networks and sizable cash flows. They also have pricing leverage which, in an era of cost controls and profit maximization in the industry, could favor these upstart formats as they fight to steal market share away from IMAX.
While the future is undeniably bright, the company needs to continue to execute its expansion in a way that promotes their brand and does not go over budget. Research and development expenses, as well as foreign exchange rates and assorted costs related to local regulations, figure to rise as the company enters new countries over the coming years. The expansion will place added pressure on operating margins, thus increasing IMAX’s reliance on production studios’ ability to release blockbuster fare and fill theater seats.
In sum, we have believed in the IMAX story for years. Still, the shares are likely not for everyone. As it grows into new areas, its operations are constantly under pressure. Be it through regional competition to local taxation and regulation, global growth comes with its fair share of risk. Those investors seeking long-term exposure to the entertainment industry could do a lot worse, though, and we think IMAX’s profit growth potential over the next several years is above average. At its recent price level, we think now is a good time to consider IMAX shares.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.