Could Cineworld shares come storming back in 2023?

Last year was a terrible one for shareholders Cineworld (LSE: CINE). The stock lost about 88% of its value in 2022.

2023 is off to a stronger start, with the stock up 10% since the start of January. Could this be a sign that they are on track to have a strong year – and perhaps a reason to invest now?

Long-term vision

I think the last year’s performance and also the price improvement in January can be pinned on the same causes, although they move in different directions.

Cineworld is a basket case of businesses because of its huge debt pile. Many investors gave up hope in the company last year, hoping that shareholders will be wiped out, or almost wiped out, by creditors if the company manages to go bankrupt. There are no dramatic changes in the underlying business.

But the company has been working to improve its finances, including trying to sell assets. If it can release enough value, it may allow the company breathing space to negotiate with creditors and a chance to rebuild the business. I hope that has led Cineworld shares to rise this month.

Difficult situation

A sale of these assets may still occur. It’s possible that creditors can renegotiate their debt so that shareholders don’t default. But when I expected them to focus on their own interests, I saw that it was an impossible scenario.

Indeed, the company this month expressed the possibility of “a very significant liquidation of our existing equity interests in Cineworld… there is no assurance that there will be any recovery for our existing equity shareholders in Cineworld“.

When a company repeatedly warns its own shareholders that it could be thrown out, I take it seriously. In itself, that’s a big enough red flag of risk involved to stop me from buying Cineworld shares at this point.

recovery prospects

While they trade for just a few bucks each, the shares can move around a lot in terms of percentage, even with a move of just a fraction of a penny.

I see recent rallies driven more by optimism than hard analysis. If there is enough optimism in the market, the rally can continue. This could increase Cineworld’s stock during 2023, possibly dramatically.

Stepping back from the short-term share price action, as a long-term investor I continue to avoid Cineworld like the plague. It is trying to sell its assets. Plus the net debt at the end of June was a colossal $8.8bn, and the recovery in the core business was incomplete. Revenues in the first half of last year remained 30% lower than the pre-pandemic equivalent of 2019.

That at least suggests that the core business is on track to recover in terms of profitability, albeit gradually. I think that big companies and strong market positions can help attract more customers back to the silver screen. But the finances are just terrible. I see a real risk that the shares will end up going up in value.