IMAX’s 28.4% return over the past six months has outpaced the S&P 500 by 18%, and its stock price has climbed to $36.07 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy IMAX, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is IMAX Not Exciting?

Despite the momentum, we don't have much confidence in IMAX. Here are three reasons why IMAX doesn't excite us and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. IMAX’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.2% over the last two years.

2. Fewer Distribution Channels Limit its Ceiling

With $377.7 million in revenue over the past 12 months, IMAX is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

IMAX historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.8%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

Final Judgment

IMAX isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 23.9× forward P/E (or $36.07 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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