IMAX Is No Fad

Shares of IMAX (Nasdaq: IMAX  ) traded as much as 8% lower today, after a Seeking Alpha contributor published a bearish take on the company.

Calling IMAX a fad stock and a premium cinema gimmick are some pretty heavy bearish assumptions. I spoke to IMAX CEO Rich Gelfond today, who naturally wasn't very happy with Larry Meyers' piece.

"IMAX has been in business for 43 years," Gelfond responds. "I find it unusual to call a 43-year old business a fad."

Meyers compares IMAX to Jones Soda (Nasdaq: JSDA  ) , Build-A-Bear Workshop (NYSE: BBW  ) , and Heelys (Nasdaq: HLYS  ) . It's a laughably unfair comparison at all three levels. Jones Soda wasn't able to turn edgy marketing of its alternative beverages into a profitable business. Heelys and its rolling shoes were quickly exposed as safety risks. Build-A-Bear has been posting negative store-level comps every single year since 2004.

Where does IMAX fit in all of this? Let's cut to the box office receipts.

Multiplex operators may have had a flattish 2010, but IMAX screenings of digitally remastered flicks generated $546 million in ticket sales last year, more than doubling the previous year's receipts.

Infinite possibilities
Meyers also picks on the finite expansion potential of IMAX, singling out a goal of 1,300 screens before the market is saturated.

Gelfond points out that theater count goals are moving targets. A few years ago, IMAX saw China as a 90-screen market. There are now 177 screens either open or in the order backlog. Russia was seen as a 30-screen country, but there are already 40 IMAX screens either open or contracted to open there.

"The market changes, and our intelligence changes," Gelfond says.

Meyers also points out that moviegoers will tire of the trend of IMAX shifting to smaller screens in many of its multiplex locations over its eight-story-tall museum-based projections.

Really? I didn't even need Gelfond to respond there. I've heard the "LieMax" arguments for a couple of years, and clearly we see how moviegoers have responded. Whenever a new release is available on IMAX, those screenings take in a far greater percentage of the viewers than conventional theaters.

To 3-D or not to 3-D
It's always possible that 3-D is a fad. Shares of DreamWorks Animation (NYSE: DWA  ) and 3-D outfitter RealD (NYSE: RLD  ) took a hit after an uninspiring debut for Kung Fu Panda 2 two weekends ago.

However, the failure of the computer-rendered martial arts flick actually validates the IMAX model. Most of its screens were airing the fourth installment of Disney's (NYSE: DIS  ) Pirates franchise. The growing number of flicks being remastered for IMAX is making the company more blockbuster-agnostic. If a dud hits the super-sized screen, a replacement is never too far away.

Shares of IMAX may not necessarily be screaming bargains. The stock hit a fresh multiyear high earlier this month and currently trades at 33 times this year's projected profitability and 22 times what analysts are targeting for 2012.

However, the company's improving fundamentals continue to make it a stronger company. It's been able to refinance its debt at more attractive rates and now has greater financial flexibility to dabble into more of its revenue-sharing arrangements where IMAX is even collecting a piece of that heavily marked up tub of popcorn you're going to buy during tonight's Super 8 advanced screening.

Calling IMAX a fad ignores its history. Calling this a finite market dismisses the potential of an exhibitor adding more than one IMAX projection system in any given multiplex. Calling for moviegoers to walk out of the smaller-sized IMAX screens fails to point out that this still represents a far greater cinematic experience than conventional screens or anything that one can round up at home.

Premium cinema is here to stay. The same can't be said for the kid on wheels holding an overpriced stuffed bear while sipping down Tofurky-flavored pop.

Is an IMAX screening worth the premium? Please share your perspective in the comment box below.

Motley Fool newsletter services have recommended buying shares of Walt Disney, DreamWorks Animation SKG, and IMAX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz is a movie buff, but he doesn't own shares in any of the stocks in this story, except for Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (10) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2011, at 12:45 PM, Chris1016 wrote:

    I agree. IMAX has been making some bold moves overseas and expanding its base without overextending. It still has plenty of room to move up.

  • Report this Comment On June 10, 2011, at 1:16 PM, ckarasiewicz wrote:

    Something needs to be done about Seeking Alpha - they're total market manipulators. Just look at what they did to Ebix with their false articles that they published throughout the course of a day (and probably made money off of on the huge dips they caused). Same thing here with Imax.

    Look at the charts, when Seeking Alpha publishes a scathing article, the bottom falls out on stocks like Ebix, etc...

    Smells fishy if you ask me...

  • Report this Comment On June 10, 2011, at 2:11 PM, therealguru wrote:

    This is the problem. Larry's article couldn't be more inaccurate, the story of IMAX not being able to generate cash is old news. The possibility of consumers choosing to not pay the "premium" for IMAX theaters has been around for a while as well, Larry did not mention anything new in his analysis. His argument on the "finite" amount of screens was so foolish that I actually giggled when I first saw it. However though, Larry actually exposed a problem within IMAX that happens to every great growth stock a few times a year - there are too many longs shooting for the sky with absolutely no discipline. I am a long term bull in IMAX, I believe the business is worth $5 billion or $77.82 a share in the future, but if you just read the comments that people posted to argue their case for being bulls, it was worse than Larry's article that was published. The stock may be under pressure for a few weeks, maybe even months, until the people who think they can just buy the stock and it will go up every day get washed out. This happens all the time, and it is truly unfortunate when it does happen to a good company like IMAX. Look at ARUN, MAKO, RLD, BIDU - these are just a few growth stocks that have had 20% or more haircuts over the past month, when all these companies have high growth expectations going forward. The market will wash out all the ignorant longs in the stock along with other growth stocks and create a good position building opportunity in the future. Don't be mistaken, IMAX is no short, but lower prices in the near term is very possible/probable. I want to reiterate that it wasn't Larry that moved the stock with his analysis of news that has been chatter for the past three years, I am telling you it was the comments from all the bulls on the first published bearish article in about 10 months combined with growth stocks taking a serious breather. Wall street has more money than you do, and trust me if you are being a pig they will force you out of your position.

  • Report this Comment On June 10, 2011, at 2:12 PM, Caruzin wrote:

    All I can really comment on is the fact that the one IMAX theatre in this city of nearly 400,000 people was permanently closed due to a lack of ticket sales after an approximate 5 year run. That was about 6 years ago. It would be interesting to know how many other IMAX theatres have had to shut down. Perhaps there IS something to the fad idea but to be fair to IMAX, before our screen closed, there wasn't much in the way of mainstream movies available; just a bunch of IMAX produced films about nature, etc.

  • Report this Comment On June 10, 2011, at 3:23 PM, LMSolo2 wrote:

    To call IMAX a fad is simplistic to the point of meaninglessness. In reality, IMAX cannot succeed 10 years down the road unless it is getting ready to design and implement the worlds biggest LCD display. Did I forget about marketing it as well?

    IMAX is all about film and digital projection. In the final analysis, IMAX's fabulous 70mm projection system is nothing more than a vastly improved and highly refined version of Thomas Edison's original design- 24 frames of film, backlit by a bulb and projected through a lens onto a big opaque screen. Even their digital presentations, 3d or otherwise, are nothing more than highly refined video projections.

    Ready or not, the future of motion picture exhibition lay more in refining your home HDTV screen. Imagine your home HDTV the size of an IMAX screen. Impossible? Cost prohibitive? Maybe today, but not so in 10 years. BACKLIT presentations are where the film industry is headed. And, it will happen faster than your old LP vinyl records vanished from retail stores.

    Is IMAX ready? Does IMAX have the chutzpah to let their shares slide while they shift assets to research and development? I don't know how far their vision reaches, but one thing is sure-- "movie theatres" as we know them today..technologically at least... are on their last legs.

    I'll feel a lot better about my investment the minute management starts to address this all-important issue.

  • Report this Comment On June 10, 2011, at 3:27 PM, chastom929 wrote:

    Thanks Motley Fool for the article and setting the record straight. Is Larry trying to knock down the price of the stock so he and friends can get in at a lower price? Is he ticked that he didn't buy it at $10 a share? He could have at least waited for the receipts from Cars 2 and Harry Potter were released. The company is expanding INTERNATIONALLY, not just domestically. As long as the studios want to shoot in the IMAX format, the company will contnue to thrive. 3-D may be a fad, but IMAX does not project only in 3-D. That's the great part about the company. Thanks again Motley Fool.

  • Report this Comment On June 10, 2011, at 3:51 PM, therealguru wrote:

    LOL and for the record there is no way Rich Gelfond spoke to Motley Fool about the current stock speculation, give me a break.

  • Report this Comment On June 11, 2011, at 11:28 AM, dbtheonly wrote:

    Rick,

    I do believe that "therealguru" just called you a liar.

  • Report this Comment On June 11, 2011, at 12:00 PM, TMFBreakerRick wrote:

    I'm not sure if "therealguru" is implying that I never spoke to Gelfond or that the discussion was about stock speculation. It wasn't about stock speculation (and I never implied that it was).

    We did talk on Thursday, and it was directly related to Larry's bearish article.

    Here is the recording of the interview, by the way:

    http://www.youtube.com/watch?v=LHP2AP78n7k

  • Report this Comment On July 17, 2011, at 2:25 PM, kramsigenak wrote:

    Hi Rick,

    Have to show you my response to Larry's rip-job on IMAX.

    "Deal. 2016, if the stock is at zero you win. I assume you are a gentleman (until proven otherwise). A gentleman's bet, I'll accept a coupon to see a movie in IMAX. You (in the highly unlikely scenario of winning) can choose something of equivalent price (let's call the value 20 bucks).

    Perhaps you are a fan of blockbuster? I could also send you a nice VCR tape or betaMax if you prefer... I imagine that's your idea of innovation."

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