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Elevator Pitch
IMAX Corporation (NYSE:IMAX) is rated as a Buy.
My earlier January 30, 2023 article was focused on IMAX’s business prospects in China. The current write-up details the reasons to stay bullish on the stock.
IMAX’s share of the worldwide box office has expanded in the past few years, while the company’s technology is also gaining recognition from the key film industry players. In the long run, IMAX Corporation’s top line mix is expected to become more diversified, which will translate into less volatile revenue streams that warrant a positive valuation re-rating. I leave my Buy rating for IMAX unchanged in consideration of these favorable factors.
Positive Read-Throughs From Dune 2 Movie
In the previous month, IMAX issued a press release disclosing that the company delivered its “biggest global weekend market share (22%) in IMAX history” with the movie “Dune: Part Two” aka Dune 2, which was “shot entirely with IMAX digital cameras.”
There are two key favorable takeaways from IMAX Corporation’s excellent performance pertaining to the Dune 2 film.
A key takeaway is that IMAX has been gaining an increasing share of the worldwide box office in recent years, and the strong numbers for Dune 2 are a validation of this trend. IMAX Corporation revealed in its investor presentation slides that the company’s global box office market share grew from 2.5% in 2017 to 3.2% last year.
At its Q4 2023 earnings briefing in late-February this year, IMAX emphasized that its 3.2% worldwide box office share was achieved with “less than 1% of the screens globally” and highlighted that it only boasted a “47% global penetration with our current footprint of open locations.” These numbers suggest that there is ample room for the company to increase the number of IMAX theaters and expand its market share in the future.
Another key takeaway is that IMAX is increasingly seen as an important driver of box office performance by the movie industry players such as studios and directors.
The company noted at the Morgan Stanley (MS) Technology, Media & Telecom Conference last month that a growing number of movie studios consider factors like an “IMAX release” and the use of “IMAX cameras” as part of their “green light process.” IMAX Corporation also shared at the March 2024 MS investor event that “the vast majority of those movies” scheduled to be released on IMAX screens between May 2025 and September 2025 is “going to be filmed with IMAX cameras.”
The director Denis Villeneuve made the decision to film 100% of Dune 2 with IMAX cameras. This was because “the results” with Dune 1 (40% of the movie was filmed with IMAX cameras) were “so good visually” as per IMAX Corporation’s comments at the recent Morgan Stanley Conference. It is reasonable to assume an increasing number of directors are embracing the use of IMAX cameras like Dune 2‘s director.
Diversification Beyond Movies
Recent news flow indicates that IMAX Corporation is broadening its revenue mix beyond its core product offering, movies.
A March 19, 2024, media release published by IMAX Corporation mentioned that “Deep Sky, an IMAX Original documentary about NASA’s Webb Telescope” will be screened “exclusively in over 300 IMAX theaters across North America” for a week beginning on April 19. Separately, the company disclosed on March 29 that NBC “will extend its live coverage of the 2024 Paris Olympics Opening Ceremony to IMAX locations” for “the first time ever.”
Earlier in January this year, IMAX Corporation appointed Anne Globe as the company’s new Chief Marketing Officer. In the January 16, 2024 press release announcing the appointment, Anne Globe was quoted as saying that she will “bring everything I’ve learned working across film, TV, games, and digital platforms to IMAX as it expands into new experiences and events (my emphasis).” It is clear that IMAX has brought in a new Chief Marketing Officer with the aim of supporting the company’s diversification into new areas like documentaries and events.
At the March 2024, Morgan Stanley Technology, Media & Telecom Conference, IMAX’s CEO Richard Gelfond highlighted that “over time, you’ll see us mix in more documentaries, more alternative content.” A more diversified top line mix in the medium to long term is likely to allow IMAX to command higher valuations for the future. This view takes into consideration expectations that IMAX’s future revenue should be more stable or less dependent on individual movies’ box office results.
Q1 Results Preview
It is estimated that IMAX will likely report the company’s first quarter earnings in the later part of the current month.
The market thinks that the company should have done poorly in the first quarter of 2024. In specific terms, the consensus financial forecasts point to a -11.8% YoY decline in top line and a -45.1% YoY drop in bottom line for IMAX in Q1 2024. It is understandable that analysts have a downbeat view of the film industry, because of the disruption to movie production resulting from the Hollywood strike.
But expectations are low, and this puts IMAX Corporation in a good position to achieve a Q1 2024 results beat.
A December 19, 2023, Bloomberg article projected that box office takings for North America could decrease by -11% for full-year 2024. However, things might turn out to be much better than what the market is anticipating. As a reference, IMAX indicated at the Morgan Stanley investor conference in March that the year-to-date YoY decline in the overall box office market narrowed from -20% YoY previously to -13% YoY after Dune 2 was screened for a week. The company’s CEO also outlined his view at this MS investor event that IMAX’s “2024 is going to be much better than the Street and the consensus.”
In a nutshell, my opinion is that IMAX’s first quarter financial results will exceed expectations, taking into account the good performance of Dune 2 and the company’s bullish commentary.
Key Risks
There are short-term and long-term risk factors associated with IMAX that investors should watch.
In the near term, a Q1 2024 results miss or the weaker-than-expected box office receipts for new movies screened in IMAX theaters will likely hurt the company’s stock price.
For the long run, investors might be disappointed if IMAX fails to diversify its revenue mix beyond moves in a meaningful way.
Final Thoughts
I retain a Buy rating for IMAX Corporation. I see multiple positives for the stock such as market share gains, increased industry acceptance, and revenue diversification.
The market values IMAX at 17 times consensus FY 2024 normalized P/E now. As a comparison, the company’s consensus FY 2024-2027 normalized EPS CAGR estimate is +23%. These metrics sourced from S&P Capital IQ translate into an attractive PEG or Price-to-Earnings Growth multiple of below 1 times or 0.74 times to be exact for the stock, and this makes IMAX Corporation a Buy-rated name in my opinion.
