I Have Not Given Up on MoviePass

I know that many have now totally given up on MoviePass and HMNY stock.   I completely understand why, with the stock being almost totally wiped out now, and relentless shorting and uncertainty facing the company, it is hard to blame folks for feeling that way.   Even for me, the committed 5 year long, this has been a remarkably unpleasant ride to take.

For me personally, I feel much worse about recommending the stock to people than I do about my personal losses.   Again, I limit all individual stocks to less than 2% of my portfolio, but losing 2% is NOT fun, and it is made much worse knowing others lost money on my recommendation, and I do truly apologize for that loss and my poor timing here.   Truly if you lost money based on my recommendation, I apologize.

Now with that out of the way,  I thought I would share why I still hold out hope for the MoviePass and HMNY.

I am going to start with the worse case scenario, not that I think it is imminent, but given we are closer than I would like to be, we have to start thinking more about what is the asset value here if any, and how would you think about that.

I am not going to get into potential suitors for the assets in this post.  There are quite a few companies that might find MoviePass an interesting target, and there are likely several private equity firms who might want to take a chance with it.   The silver lining of HMNY not being able to secure significant debt is that stockholders should actually get some value out of whatever liquidation plan might come to pass.

There are a few different assets one can think about here and contemplate their value.   In order of value, I think they have the following key assets.

  1. Subscriber Base
  2. Revenue Run Rate
  3. Total Online Audience including Moviefone
  4. Technology & Patents
  5. Mastercard – Billing relationships

I am not suggesting that you can separate out these assets and sell them piecemeal.  Rather, I think it is useful to think through what the company has built over the past few years, and how these different pieces can be thought of in terms of value.   I will take a crack at each piece here, and of course, the mileage will vary on these types of valuations based on lots of variables.

Subscriber Base – This is the core asset of the company at this point.  Everyone knows that this is a unique and slightly stressed asset in this case because MoviePass is losing a lot of money on these subscribers every month.  Of course, MoviePass has taken significant measures to reduce the cash burn, but it is yet unclear how successful this has been and we won’t know for sure for a few more months.    The important thing to note here is that MoviePass has up until now been making the conscious choice to spend money to build up their user base by spending big money to offer an incredible too good to be true offering.    MoviePass I believe has all the levers it needs to drop the hammer, and turn the subscriber base to break even anytime they want.  That would result in some significant churn of the subscriber base, but I believe MoviePass could raise their price,  and combine it with surge pricing and get to breakeven very quickly.   I think they could easily raise the price to $14.95, continue with Surge pricing, and that would get them very close to breakeven.    I think the worse case scenario on churn- if they did drop the hammer -would be 33% of the base would leave, and many of those, probably greater than 50%  or more would be heavy users who cost MP money anyway.    A move like this would still leave MP as a great deal for most consumers, and they would likely also continue adding new customers who were not all caught up in the emotional baggage of change.

So with all that, I think MoviePass could easily have 2 Million Subscribers at breakeven @ $14.95 a month – or $180 a year.  That would give them $360 Million a year in monthly subscriber revenue and easily another $40 Million in Surge Revenue.     So $400 Million in breakeven revenue, with likely still very high growth rates.   That is a valuable asset – no doubt about it.

Take Spotify for example – they claim it takes 12 months of premium subscriber months before they break even on their acquisition costs.  Interestingly they use their free “ad-supported” service, as their acquisition vehicle to get their premium subscribers.  This is NOT that different than what MoviePass is doing.  The big difference, of course, is MoviePass is essentially doing a promotional price as their core offering to juice up their subscriber count.   Knowing that they eventually would raise prices and do variable pricing via surge pricing.   If you calculate the customer acquisition costs of Spotify premium users it ends up being at least $25 bucks a subscriber, however many people argue it is much higher.  They don’t disclose it.   But let’s just say that $25 is the number.   And for the sake of argument lets say that a Spotify premium customer acquisition is equal to a MoviePass customer acquisition.   That would mean there is a $50 million asset right there.   This is not the LTV of the customer, but simply the asset customer acquisition activity.   That is already above the current market cap of MoviePass.  So that makes no sense at all.

You can start to do all kinds of new calculations with scenarios where MoviePass stops the bleeding and even makes some money on subscribers.  You can come up with LTV (Lifetime Values) by taking the ARPA (Average Revenue Per Account x estimated Margins / over churn to come up with reasonable values.

I can easily model out scenarios that give $40 to $60 LTV’s assigned to a smaller more profitable MoviePass subscriber base, which again would get you to well over the today’s total market cap for HMNY.   Here’s a good example of how people think about it for Spotify.

The point of the all of this is that the market is irrationally assigning an extremely low value to the MovirPass subscriber base.  It is assuming that MoviePass will not see improvement in COG’s via more theater deals, and it is also assuming that MoviePass can’t raise prices without causing too much churn to their base.    I think both of those things are NOT true – and that MoviePass will end up both reducing COG’s and increasing revenue while churning out many of their worst customers.

Revenue Run Rate –  I have mentioned this before, but it is worth repeating it here.  It is damn hard for companies to find 1/2 Billion in Revenue.  And there are a LOT of companies that want to show revenue growth and would love to have an asset of reliable revenue growth at these levels, even if it were only breakeven for now.   If you talk to any CFO who knows how to dress things up for Wall Street, the street wants 2 things.  1- Growth 2-Profit.   There are companies out there sitting on decent profits but zero or negative growth.   They might even have some fat left to cut to get more profits from their existing business, but still, they can’t find the revenue growth.   MoviePass could add instant revenue growth, with the promise of more profits later down the road.   That is a very attractive component of the potential valuation of MoviePass.  Big Revenue Matters!!!    Trust me on this one.  Every CFO knows that profit improvement without growth is NOT good for their stock.  Just look what happened over at Netflix today.  Growth slowed!  They got slaughtered!

Online Audience  MoviePass has a unique situation with it’s online audience, it is now both large and very active.  The Moviefone acquisition helped grow the audience to around 10 Million people.   MoviePass so far has not done a lot with this asset but it can and I think will do much more over time.  Some have tried to compare this only audience to Facebook ARPU numbers to downplay the value of the audience.   It is a longer discussion, but in short, that is a very bad comparison.   Sites that have active users who are considering a valuable transaction are much more valuable than sites that have users who are doing all kinds of things on social media.  We called it the value funnel when I was working at MSN in Microsoft.   The closer you are to getting a person to do something that is transactional, the more money an advertiser will spend on your site to get that user.   So in the case of MoviePass & Moviefone, most users are very close to buying a movie ticket and going out of their homes to spend money in the very near term.   That has real value.   I think the audience value alone here, without the subscription side of the business is easy $7 -$10 Millon dollars, and I think that is very conservative fire sale type of price for that asset.

Technology & Patents  There is definitely some value in the tech and Patents here with MoviePass.  There is an active lawsuit underway with Sinemia to that effect.  I have written on the value of the patents already.   Please check that out.   If we get to the scaping the bones of the patents – we will be in very bad shape.  So I won’t go all crazy trying to say that this alone will save the stock, because it won’t.  But there is very real value here.

MasterCard Billing Relationships.  I am calling this out because of the unique way in which MoviePass is implemented, it requires that every subscriber has a MasterCard to enable the movie ticket transaction.   As subscribers, we all get this and know how it works.   It costs debit and credit card issuers approximately $200 to $300 in acquisition costs to sign up a new cardholder.  Think about that for a couple minutes.   Every single MoviePass one of MoviePass subscribers has a debit card issued to them, it works like any other debit card, but it is backed by a customer credit card that MoviePass has on file.   MoviePass has done something extraordinary here.   They have created 3 Million new MasterCard holders, who they can now bill for things at will (they customers will that is).   Is it worth $200 per sub?  No – but it is certainly worth $20 in a fire sale.   That is $60 Million in value all day long.  Again more than MP Market Cap valuation today.

Love or hate surge pricing, it was certainly easy for MoviePass to implement it against the payment vehicles they have on file with their customers.   Customers only had to download the new app and accept the new TOS and that was it!   They now had the ability to start charging customers for incremental transactions made with that MasterCard.    Now, think how easy it is going to be for MoviePass to add things like movie merchandise to the experience.   Think of the offers!   Just watched Incredibles – how about a cool T-shirt, action figure, lunch box. coloring book etc etc.     The amount of transaction revenue that could be generated from this MasterCard is very significant, and I see the market giving it essentially zero value.   That is irrational.

So in conclusion, I am really bummed out about the irrational negativity surrounding MoviePass and HMNY stock.   I am sorry for my bad timing and even more sorry to those who followed my lead into this stock and lost money.

But I have not given up on the company or the stock.  There is a significant set of assets here, and there is real value in this company, even in the worst of fire sale situations.   The stock is now priced so low, it makes absolutely no sense, and it is foolish to beleive that the management does not have options to unlock the value that has already been created.

I am not recommending that you buy more stock in HMNY, but I am also suggesting there is more value here than the market is giving to the company.   We went from irrational exuberance to irrational pessimism.

The market tends to be rational over the long term and very irrational in the short term.   I am hoping for some level of rationality returns here.

<<<agian – I do not recommend any single stock to represent more than 2% of your portfolio, and I recommend you keep the vast majority of your money in low-cost index funds over individual stocks.  Please don’t send me messages saying I ruined your financial life based on my advice – because quite frankly if you had followed my advice this year you would be up overall in the market>>>

 

 

 

 

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