HMNY – Delusion Dilution & a Little Bit of Disgust

I figured it was time to update my blog and say something about MoviePass.   I have to be honest, I have struggled to come up with anything new to say.  Even as the stock continues to get hammered, the overall story for MoviePass and the potential of the business seems to have not changed very much.  I stand behind the models I have published.   Others have proposed their own models including Mark Gomes and Julian Lin who did a sort of scattered model on Seeking Alpha, he used a crazy high Utilization rate and made no correction or even a mention any of the changes made by MoviePass to reduce utilization.   Gomes updated his model to reduce utilization, and his estimated cash burn rate has come down.   He is still pessimistic about the company.   I have not received any new information or any new reason to believe my models are off, and I have not heard a single argument for why my model does not work.

The primary argument people give me is that I am too optimistic and that Ted and Mitch are liars who can’t be trusted.   Both of which could end up being true, but for now at least, I am going to continue believing that they are running the company in good faith.  As to me being too optimistic, so far that has proven to be true, my entry point for this stock was bad, and continues to look worse on the daily.  I am an unhappy shareholder at this point.  I have averaged down, but do not plan to average down further, and won’t be buying any more of the stock until things stabilize – assuming that ever happens.

There are a lot of theories, some of which are more like conspiracy theories for why the stock has been hammered as hard as it has been.   I am not going to go into all of those here because most of them are just that, theories, and the fact is we don’t have any new official news from the company to work from.

For my part – I think I owe it to readers of my blog, and friends of mine whom I have recommended this stock to an update on my opinion as to what has happened here.  And that is how I titled this post.

Delusion: The definition of which is “an idiosyncratic belief or impression that is firmly maintained despite being contradicted by what is generally accepted as reality or rational argument, typically a symptom of mental disorder.”  I actually believe there is delusion on the bear side of the argument.   Others will obviously counter that I am the one being delusional.  No matter, maybe both sides are a little delusional here.   As I mentioned about, I stick to my model, and I have no substantive reason to abandon it.   On the bear side, the fear is palpable, hyperbolic shorts are pushing a BK scenario that makes no sense whatsoever, panicky weak hands are hanging on any chance of daily news, new articles predicting doom and total destruction are now regular multiple times daily.   If you believed the short to zero argument, you would have to believe that Ted and Mitch have no more cards to play and will walk away into the night with nothing from their efforts.  You also would have to believe there is zero value in 2.7 Million paying subscribers, zero value in the MoviePass brand, and zero value in MoviePass ventures.   That to me that seems to be at least a little bit delusional.  But ask yourself, is all of that worth nothing?  And does the company really have zero options left?

Dilution: The definition being: “a reduction in the value of a shareholding due to the issue of additional shares in a company without an increase in assets.”  Now this one gets a little bit tricky.   The last part of the definition is important to focus on.  “without an increase in assets“.    I believe that the ATM dilution is not happening without corresponding increased assets.   The assets, of course, are the new subscribers being acquired with the money raised from the selling of new stock into the marketplace.   The company has announced that it is on pace to have net additions monthly of 350,000 customers.   Unfortunately, this is not happening on the cheap, and this is why the dilution feels so painful.   And to some, it actually feels like there is no increase in assets at all.  Because if you don’t believe in the business model to begin with, you would of course argue that any new customers added are a liability not an asset.  And of course if you believe that there was no positive LTV of a MoviePass customer, you would just keep hammering away at the message that more customers will just drive the company down faster to zero, and hence you would short the stock hard, and try and continue to drive the price down further.   If on the other hand, you believe that the model does come close to breakeven when the company hits 5 Million Subscribers, you would then value the new subscribers as a valuable asset, in which case the dilution of your shares would be more acceptable to you, because you would accept that the company needed more money to grow the asset base.  This is the old argument of would you rather have 10% of $100 or 6% of $200.  The dilution fear is legitimate in cases where the money is not being spent well, or is just plain being stolen from shareholders.   If you believe that, you should not be in this stock.   Now, I am not saying that dilution is not a concern for the company, it is a concern because it is concerning to see so many new shares hitting the market.   Last checked total outstanding shares had gone up to 82.7M.   That is a lot more shares than when most of us started out with this company.   Now at today’s closing bell, the stock was trading at a measly  $.55 – Making the Market Cap 44.2 Million dollars.   There is still no significant debt for the company, and they do have a bit of cash in the bank.   Somewhere around $20 Million in cash.   So you are getting the company for about $25 Million bucks.

Yes! they are burning the cash up supporting new subscriptions – I am not ignoring that fact.  But if you pretend you are MoviePass god for the day and you could buy and run the entire company right now, you would be getting the cash, the subs, the brand and the MP Ventures movies already bought at a screaming good deal.

And, as MoviePass god,  if you wanted to, you could say – hell with it, I don’t want to lose another dime on subscribers, and you could change the plans to be even more restrictive and jack up the prices to a point where you kept all the cash and had a nice stream of revenue for quite some time.   Some, including Gomes, are suggesting that is now the best path forward.   I disagree with that path, but “reasonable” people are making that argument.

Dilution sucks, it makes it harder to get a huge huge gain out of a stock holding, primarily because the more shares out there, the harder you press up against the laws of big numbers.   If you believed that MoviePass was going to be a $1 Billion dollar company.  Now with $82.7 Million Shares out there, the stock only has to hit $11.49.   There are a lot of people who have shares above that price, and they are not happy to know that this is now the unicorn price for the stock.  I don’t blame them for feeling that way, and that is the problem with the entry point many of us had on this stock.   Gomes called it well, and I have given him a ton of credit for calling how the public market would react to funding growth via a public ATM offering.   Retail investors simply put, have not been able to deal with this very well at all.  Many have been scared out of a stock they once believed in.   Naked shorts have been ruthless in putting pressure on the stock making it go down further.   In turn, that has meant that the company has been forced to issue even more shares to generate the cash needed to keep the subscriber growth going and to support the business model until scale is ultimately reached.     So this has been a major bummer for the stockholders thus far.

I wanted to stay away from conspiracy theories – but just to whet your appetite – it is not hard to think of companies who might short this stock to make life hard for them.  There is a particular movie chain who desperately wants to see MoviePass dead, and there is at least motive for them to find ways to naked short sell the stock.  The company is owned by Chinese investors, and its initials are AMC.  If you are a shareholder, or MoviePass lover, next time you sit in an AMC theater, you might just think about how they are trying to kill your good times!

And so – yes dilution is real, yes it sucks for many of us, but there is a reason for it, and if it does ultimately increase valuable assets, as a stockholder, you will be fine.   It may take a year or more for the market to fully appreciate those assets, but when they do, you as a shareholder will by justly rewarded.

Little Bit of Disgust:  the definition of disgust being “a feeling of revulsion or profound disapproval aroused by something unpleasant or offensive”.    My feeling of profound disapproval at this point is targeted at Ted, and Chris Kelly, who continue to allow their egos to get in the way of settling what is now a long drawn out proxy battle for the company.    After I wrote the piece about this proxy battle I have now had multiple anonymous confirmations that my post was 100% accurate.  That indeed Ted and Kelly are fighting it out for control of MoviePass, and that they do indeed hate each other, and both are looking to take control of the company.   This has been incredibly bad for the company and for stockholders.  The big institutional money will not invest large sums in a company who is in a proxy battle.   It is nearly impossible to get any reasonable debt when in a proxy battle.   Further, it becomes a big day to day distraction on the business, while in its most crucial stage and needs focused management attention and execution.   I am disgusted by this, it is ego-driven, and does not help the company, the employees, or the shareholders.   It needs resolution, and these jackasses need to make amends NOW!

I am also further disgusted with Ted’s totally JV PR moves.  The latest being a tease of an acquisition announcement at Cannes that never materialized.   As most readers know, I worked at Microsoft for a long time.  I can tell you that it is basic 101 that you NEVER talk about a deal publicly before it is done.  NEVER – EVER – NEVER.   It is just so stupid that I can’t believe the CEO of the company made that mistake.   If you did that at Microsoft, you would be fired, seriously, your career would be over.  Of course, we can’t just fire Ted – but over time… maybe 🙂

Ted has shown that he is just crazy enough to get the financing to make this thing happen, but also too damn crazy to run this company to a sustainable multi-billion dollar Unicorn.   Maybe he can learn enough on the job to get over the hump.  But my sincere hope is that he does the right thing when the Proxy is resolved, and hands the company over to Mitch to run it, and takes a seat as Chairman of the Board.  Let Mitch do the heavy lifting.  He’s done it before.  Ted has done almost nothing – other than run companies into the ground, before.

So with all that, I remain long, upset with management, dissapointed with my entry point into the stock, hopeful that in a year or so, we will be seeing better days and higher stock prices.