Goldman downgrades Imax and Cinemark to sell, says theater stock rebound has gone too far

Published Wed, Jun 2 20216:06 AM EDTUpdated Wed, Jun 2 20217:52 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The market appears to be too optimistic about the recovery for movie theaters, and investors should dump their positions in Imax and Cinemark , according to Goldman Sachs. Theaters are coming off their best weekend since the pandemic hit the U.S., with the success "A Quiet Place Part II" helping the industry generate more than $100 million in ticket sales over the four-day Memorial Day holiday weekend . The movie made $5.3 million at Imax alone, according to the theater company. However, analyst Michael Ng downgraded Imax and Cinemark to sell from neutral, saying in a note to clients on Wednesday that the stocks appeared overvalued and investors should look for entertainment exposure in other sectors. "We see limited upside to their share prices relative to the rest of our coverage universe and expect the domestic box office recovery to be more limited than what is currently being priced in," the note said. "Relative to the rest of our coverage universe (Internet, Video Games, Toys), where we have 11% upside to our 12-month price targets on average, we have 15% downside on average for our theatre coverage." The firm projected that the box office will reach just 72% of its pre-pandemic level in 2022 and said the shift toward shorter theatrical windows could take a bite out of theaters. "Although we recognize that ~90% of a film's cumulative domestic box office has historically been realized within the first 5 weeks ...., we highlight that this occurred in a period where a ~3 month theatrical window was the standard and believe that a shortened home video window could negatively impact theatrical attendance," the note said. The two stocks have outperformed the broader market year to date, though neither has seen the Reddit-fueled surge that rival AMC has had. Goldman does not cover AMC. Cinemark shares are up 40% this year, while IMAX is up 24%. Goldman lowered its price target on Cinemark to $19 per share from $21 and for Imax to $18.60 per share from $19.60. Those targets are 22.1% and 16.5%, respectively, below where the stocks closed on Tuesday. -CNBC's Michael Bloom contributed to this report.

The Regal Irvine Spectrum has reopened with a new high-tech look including the dramatic hallway lighting leading to the IMAX theater on September 17, 2020 in Irvine, California.

Gina Ferazzi | Los Angeles Times | Getty Images

The market appears to be too optimistic about the recovery for movie theaters, and investors should dump their positions in Imax and Cinemark, according to Goldman Sachs.

Theaters are coming off their best weekend since the pandemic hit the U.S., with the success "A Quiet Place Part II" helping the industry generate more than $100 million in ticket sales over the four-day Memorial Day holiday weekend. The movie made $5.3 million at Imax alone, according to the theater company.

However, analyst Michael Ng downgraded Imax and Cinemark to sell from neutral, saying in a note to clients on Wednesday that the stocks appeared overvalued and investors should look for entertainment exposure in other sectors.