Despite expecting a sharp domestic box office recovery in 2021 and 2022, Goldman Sachs analyst Michael Ng downgraded both Imax (IMAX) and Cinemark (CNK) to Sell as he believes this is already reflected in current valuations. Further, the analyst believes that the closure of theatres during the pandemic may have accelerated the secular decline in movie-going and attendance, hamstringing the box office recovery back to pre-pandemic levels.

SELL IMAX, CINEMARK: Goldman Sachs analyst Michael Ng downgraded both Imax and Cinemark to Sell from Neutral with price targets of $18.60 and $19, down from $19.60 and $21, respectively. The analyst expects a "sharp" domestic box office recovery in 2021 and 2022 but believes this is reflected in the stocks' current valuation. Further, Ng expects the domestic box office recovery to be more limited than what is currently being priced into the shares. The box office recovery is at greater risk as consumer behaviors shifted during the pandemic, and film studios are increasingly leaning on home video and home video windows are declining, Ng contended, adding that he is more cautious on the box office outlook.

The analyst noted that although there's been a secular decline in movie-going, attendance declines have happened at a very slow pace. That said, he believes that the closure of theatres during the pandemic may have accelerated the secular decline in attendance, hamstringing the box office recovery back to pre-pandemic levels. Nonetheless, Ng acknowledged that he is "encouraged" by the pace of box office recovery in 2021 to-date, and is forecasting the 2021 domestic box office to recover sharply to $5.4B in 2021. More importantly, the analyst expects 2022 to represent a return to a more "normal" year from which to grow off and forecasts domestic box office of $8.2B. Although this is consistent with AMC's (AMC) box office expectations of $5B-plus in 2021 and $8B-plus in 2022, the analyst believes this is lower than what's currently being priced into consensus valuations for Cinemark and Imax.

WHAT'S NOTABLE: Shares of AMC were in the spotlight on Tuesday after the theater chain announced that it raised $230.5M by selling 8.5M shares to Mudrick Capital Management. The company said the cash will be used to buy new leases and "enhance consumer appeal" in existing locations. According to a media report, however, Mudrick Capital has since sold all of its stock in AMC, telling clients the shares are "massively overvalued." 

Subsequently, AMC Entertainment announced that it is launching "AMC Investor Connect," a communication initiative that will put the company in direct communication with its individual shareholders "to keep them up to date about important company information and to provide them with special offers." The company said, "Over the last several months, AMC has seen its retail shareholder base grow beyond 3 million owners. With this sizable number of retail shareholders, AMC is taking a groundbreaking new approach to investor relations and investor communications. AMC Investor Connect launches in conjunction with the preliminary proxy statement for AMC's July 29 annual meeting of shareholders, which is expected to be filed publicly on June 3, 2021." Investors who sign up will be awarded with an initial free large popcorn usable this summer when attending a movie at an AMC theatre in the United States.

PRICE ACTION: In Wednesday morning trading, shares of Imax have dropped over 5% to $21.14, while Cinemark's stock has slid more than 4% to $23.32. On the flip side, shares of AMC are on the rise again, having jumped another 23% to $39.40.