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Not Too Appealing, Even in 3-D



September 07, 2010 – Comments (3) | RELATED TICKERS: RLD.DL


Several weeks ago, July 27th to be exact, I shorted the stock of RealD, Inc. (RLD) in CAPS stating the following:

Like most of the people in the U.S., when the current fad of introducing movies in 3D started I got swept up in it, went to see several 3D movies, and thought that they were cool. Perhaps it was nostalgia that sucked me in, thinking back to my youth when we picked up paper 3D glasses at 7-11 and watched a couple of cheesy 3D horror flicks on broadcast television.

Last year I saw a couple of movies in the theater with my older son in three dimensions, including Ice Age: Dawn of the Dinosaurs and Up!. As time wore on though, I tired of watching movies in 3D. The last 3D movie that I saw was the new Clash of the Titans. Not only was the movie not great, but the 3D aspect really didn't add anything to it...other than several dollars to the price of each ticket. I missed the huge blockbuster movie Avatar in the theaters, so I decided to watch it on Pay Per View in HD instead. I have to tell you, I didn't miss the 3D one bit.

To be honest with you, watching movies in 3D with the glasses actually makes me feel sort of sick after a while. It certainly is less relaxing than vegging out to a normal movie. Consumers Reports recently reported on this very subject in an article titled Having trouble seeing 3D?. 

I have taken both of my sons to see a couple of new movies recently, including Toy Story 3 and Despicable Me. Despite the fact that both were offered in 3D, we went to their old-school 2D showings. I wasn't just that I had my doubts about whether my two year-old would be willing to keep the 3D glasses on the entire time, I just don't enjoy 3D movies...certainly not enough to justify paying several dollars more a piece for four tickets to see one.

I came across several articles on the subject today.

Hollywood fears the 3D bubble has already burst

Like RealD's Stock Price, 3-D Movies Face a Bumpy Ride

Why 3-D is already dying

Here's what a recent article in the UK's Daily Telegraph has to say on the subject:

The proportion of cinema-goers who opt to see new films in their 3D versions has fallen steadily over recent months, with more opting instead to watch them in the traditional - and cheaper - format.

When Avatar came out in December, 71 per cent of Americans who went to see it on opening weekend - often the peak moment for a new release - opted for a cinema showing the 3D version. In March, when the animated fantasy How to Train Your Dragon was released, 68 per cent of the audience chose to see the film that way.

But by May that figure for Shrek Forever After was down to 61 per cent. At the beginning of this month only 56 per cent saw The Last Airbender in 3D, and a week later the proportion fell even lower, to 45 per cent, for the newly-released animation Despicable Me.

The figures have provoked an anxious debate within the film industry, which had previously hatched plans to convert popular films on its backlist - everything from the Star Wars trilogy, to Harry Potter, to the college pranks of Jackass - into the cinematic style du jour. Studios are already working on at least 24 brand new films in the expensive format for release next year. Now some fear that the "3D bubble" has already burst. 

Capitalizing on the recent euphoria surrounding 3D, a company called RealD (RLD) went public last week. The company is the market leader in installing its 3D screens in movie theaters. Despite its sector-leading market share, over rivals such as Dolby, IMAX, MasterImage, and Xpand, RealD has yet to turn a profit. I suppose the logic is, become the market leader by installing as many screens as possible, as quickly as possible and worry about turning a profit later. Its revenues have been growing at a tremendous pace, but I suspect that its revenue growth lose steam more quickly than many people think. Plus RLD is already trading at something like 3.5 to 4 times sales, which is pretty rich. The company will report earnings on August 2nd, so we'll get a closer look at how things are going for the industry then.

Perhaps I'm jumping off of the 3D bandwagon too early and it will end up being a disruptive technology like cell phones, or color television once were. Time will tell, but my disenchantment with 3D caused me to short the shares of the recent IPO RLD today at $18.70/share.

I have a feeling that it's not just me who feels this way about 3D. Does anyone else out there agree with me? I'd love to hear others' thoughts on 3D movies in general or specifically about RealD.

Short theses for "growth" companies often draw a lot of angry responses from people who love the company or its product, such as this comment that I received after my RLD pitch:

"...If you base your investments on such arbitrary things, you are sure to lose big. "

There's nothing arbitrary about shorting the stock of a money-losing IPO at what quite possibly could be the height of a fad.  Since I initiated my trade in CAPS RLD has fallen over 8.5% versus a drop of just under 2% for the benchmark S&P 500. Not bad, but I expect that the stock has further to fall.

This week's Barron's contains an article on the company titled Not Too Appealing, Even in 3-D.

As one is able to tell by the title, the author believes that RealD's stock has further to fall as well.

Here are a few relevant quotes from the article:

The day RealD came public, July 16, at $16 a share, it jumped 22%. It got as high as $21, although it's since slid to around $17. But even at that price, it looks overvalued. In fact, a fair price might be $13—the bottom of the IPO's original expected range.

In fact, RealD's initial public offering last month was somewhat reminiscent of those late 1990s high-tech IPOs that ultimately led to nothing but regret for those who bought the hype and ended up with only the stock.

"The question I keep asking myself is: 'Why did RealD come public?''' says Rich Greenfield, an analyst at BTIG Research, an independent research firm. "It didn't need the money. It has no debt, and minimal capital spending relative to its cash flow." And he adds: "I suspect the IPO was more about insiders selling.''  

Which, in fact, is what those insiders did. With the IPO, the company sold six million shares at $16, generating $96 million. Meanwhile, stockholders sold almost 8.4 million shares–more than had been planned – to raise $134 million. When the insiders, the supposed smartest guys in the room, are selling, it's often a signal that a stock has topped out. 

By reading this article I came to find out another bearish thing about the company.  I already knew that it didn't make any money and probably won't any time soon, but I didn't know that it has been issuing stock warrants to many movie theater owners who install its systems for practically nothing.  These outstanding warrants create the very real possibility of dilution for existing shareholders...though I suppose that it will make the company's losses per share metric look better ;).

I am not short RLD in real-life, just in CAPS, but this will be an interesting stock to keep an eye on.


3 Comments – Post Your Own

#1) On September 07, 2010 at 2:08 PM, vriguy (62.07) wrote:

When I saw Avatar last year in a 3D theater, I experimented by removing my 3D glasses a few times during the movie and then putting them back on.  The 3D experience was, hands down, far superior in my opinion. I'm not saying Avatar was that great a movie, it was ok, but it was better in 3D than 2D.  I've seen only a few movies in theaters since, but none that had a 3D option. Given the option I will pay extra to watch a movie in 3D; but recognize that a good 2D movie beats a lousy 3D one every time.  

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#2) On September 07, 2010 at 2:16 PM, ayaghsizian (93.88) wrote:

I was excited and happy to see Avatar in 3D.  It was great.  In a few years I might want to see another 3D movie.  In the meantime I prefer to watch 2D movies for less money.  The plot and characters matter much more to me.

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#3) On September 07, 2010 at 2:51 PM, Schmacko (91.08) wrote:

I thought Avatar in 3D was a good experience.  I thought Alice in Wonderland in 3D was a complete waste of money.  The 3D in Alice made the movie blurry around the edges and I'd read that it was because the movie wasn't actually filmed in 3D but just converted up or whatever.  I have very little desire to see new 3D movies and if the movie wasn't made for 3D from jump there is close to zero chance of me watching it.  Even in Avatar's case I don't think I would've liked the movie any less in 2D and I would've saved $2.  This definitely is not the future of movies, it's just another fad.

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