Investors in IMAX Corp (NASDAQ:IMAX) have been optimistic about the stock for a very long time, yet their hopes never really came to fruition. In fact, their hopes have been dashed, and I believe they will be dashed further as time goes on. I have personally long been critical of IMAX stock as an investment. But as I am always quick to say, I love IMAX as a product.
The problem is IMAX has never had a terribly successful business model, and it is one that I believe has always had a shelf life.
My bear case on IMAX has always been the same. There are only so many theaters in the world that can be installed with the IMAX system, and even fewer that can be built to be a customized IMAX theater. It’s finite real estate. It’s a simple as that.
IMAX stock revenues are dependent upon installation of new systems, maintenance of existing ones, finance charges earned on financing some of those systems, and on joint venture revenue sharing agreements.
Only so many new systems that can be deployed, although IMAX does continue to update and upgrade the system so it can continue to charge money on theaters that already have the system installed. Maintenance is certainly an ongoing cost but not a gigantic source of revenue. Financing income is a nice little drop in the bucket.
The Future of IMAX Stock
Investors had always pinned their hopes for IMAX stock on the revenue-sharing agreements. The theory was that IMAX would enjoy gigantic revenue boosts when one blockbuster after another would be placed into IMAX leaders where the revenue sharing agreements that we put into place.
These agreements usually involved taking about a 15% cut of box office, and in some cases of concession sales as well.
That is the same song that has been sung ever since Avatar was supposed to generate massive new revenues for IMAX. Since that time, the number of blockbuster films has only increased, thanks to the Walt Disney Co (NYSE:DIS), which has pumped out one Marvel Studios film after another, and a whole new slew of “Star Wars films” that have already come out, with more on the way.
And yet when you look at the long-term trend of IMAX revenues, they seem to pop once every five years and then plateau. Revenues were between $100 million $130 million through 2008, leaped $271 million in 2009 as the revenue sharing agreement kicked off, increased to $248 million in 2010 and remained in the $250-300 million range until 2015.
In 2015 revenue jumped $373.8 million and has been flat ever since.
IMAX stock is never had a year in which net income exceeded $65 million.
Attempts to branch out beyond these revenue streams have failed. IMAX stock took $11.7 million right down its investment with Disney on “Marvel’s Inhumans,” which it premiered the first two episodes of in IMAX leaders. To the surprise of nobody, the revenue was abysmal. People don’t want to pay to see something in IMAX that they can watch in their home two weeks later.
IMAX tried to launch a VR experience and the numbers there also didn’t work out in the company had to take a right off.
IMAX stock is what I would call “The Walking Dead.” It has a relatively stable revenue stream and makes a small amount of money every year, but it is not going to grow. You can only fit so many blockbusters into the theaters in any one year, especially when they all tend to be released at the same time.
Businesses that have consistent and reliable net income and cash flow should be throwing off at least some of that money in the form of a dividend. IMAX stock does not have a dividend and probably never will. In the meantime the market continues to value IMAX stock at $1.2 billion, despite net income – pre-writedown – of only $32 million.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
