The following story was sent to me by Sean Christopher, a reader of my blog. Sean’s story is a fascinating one, it demonstrates how Moviepass really made a difference for consumers by making moviegoing affordable again. Unfortunately, it also chronicles the pain of investing in HMNY. With Sean’s permission, I am posting his story here.
All the bitching and complaining from the scammers and past abusers of Moviepass have clogged the headlines for the past several weeks on Moviepass.
The meltdown caused by these freeloading freaks seems to have passed.
The fact is Moviepass IS WORKING! And it’s working pretty damn well! The biggest movies and the new releases are being offered with enough regularity that if you had even a mild interest in any particular film it would be a simple endeavor to find a showing.
Every single film on Box Office Mojo’s top 10 has been or currently is available on MP. A subscription customer wouldn’t miss a beat here.
Peppermint and the Nun has been widely available even at non E-ticket theaters all weekend long. Crazy Rich Asians was also widely available since release.
The app has been totally stable for weeks. And there has been nothing but improving availability for the past 2 weeks.
None of this is getting covered in the press of course, because it does not fit their negative narrative. That too could change, as the press does like a comeback kid. If Moviepass stays stable and announces any surprises the narrative could swing.
This means the nonsense of MP being a service so deprecated nobody will want it is just BS spread by competitors and abusers with sour grapes.
Moviepass works great now, and the fact is it is great deal for consumers.
Tons of options today!
Nun – Yep!
LA – No Problem
Washington D.C. No Problem
New York – you betcha!
3 High Profile Departures This Week From HMNY and Moviepass Saga – Do They Matter?
This week we saw some key people head for the exits from the Moviepass story:
- Earlier this week Board Member Carl Schramm called it quits – he claimed to be unhappy with disclosure to the board, and felt the BOD was not being consulted for big strategic decisions.
- CPO Mike Berkley threw in the towel just today. It was not clear if he quit, was fired, or if it was a mutual agreement to part ways.
- And on the finance side the last standing financial analyst killed off coverage of HMNY. Austin Moldlow from Canaccord Genuity, sent an email to subscribers Friday saying he was terminating coverage of MoviePass. This guy is a ghost on the web now. He even took down his LinkedIn profile. Maybe he fears his life…
Where there is a lot of turmoil, it’s not unusual to see a lot of turnover. Some people, probably wisely, just don’t want to deal with this level of headaches. BOD members see more risk than opportunity at these levels. Employees have seen their stock options implode and may lost faith that any new options or other compensation will make up for the hole they find themselves in.
On the analyst side, it has to be pretty humiliating to have a 99% wipeout on your tip sheet. Hell, this Moldlow guy may be finished after the HMNY debacle. Lawsuits are lined up a mile long, and was bullish recommending the stock almost the entire way through.
Berkley only made it 6 months, and honestly the product delivery seemed stalled or non-existent under his watch. So maybe it is a positive to see him go down the road. It’s rare to see a startup move so slowly with so many obvious things that seem easy to add from the product roadmap. Something is not working well there, maybe Berkley took the hit.
So it’s not surprising that some folks are jumping ship here. Maybe we will get lucky soon and Ted will jump ship, or get pushed off!
Expect a wild ride to continue.
HMNY Moviepass parent company is starting to look like a value play. I have been wrong on HMNY so far – and I admit that. But things I think this time are looking better and different for shareholders. The company seems to be showing real stability. They have wisely been mum on the PR front. When everything you say is trashed in the media, it is better to simply shut up, go about your business, and prove naysayers wrong. Ted and Mitch both have publicly stated that they have a team of people that are very motivated to prove to the world that they are right and to see to it that Moviepass survives.
I see the following key reasons why I believe Moviepass may well start a dramatic recovery very soon.
- The stock is trading at a very small Market Cap that simply does not make sense
- There is a strong possibility of a earnings surprise based on CEO’s Ted Farnsworth latest financial updates
- Further Dilution and or Reverse Split could be made unnecessary – maybe it becomes the opposite
Let me take on each point here.
Market Cap or Market Capitalization – What is it why it is important for HMNY
For this blog I have decided it is better to not simply assume that all readers know all the important investing terms. So if you are an experienced investor – sorry for the remedial lesson. So what is Market Cap – Investopedia explains it like this.
What is ‘Market Capitalization’
Market capitalization refers to the total dollar market value of a company’s outstanding shares. Commonly referred to as “market cap,” it is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.
Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion.
HMNY has a very low Market Cap because the price of the stock is low – around .0225 cents. The number of outstanding shares for HMNY is a hard thing to nail down. The reason for that is that HMNY has approved up to 5 Billion shares via what is called an ATM offering. Investors new to Moviepass and HMNY need to be aware of this and read up on it before investing in the stock. Anyway, the last known reported number of outstanding shares for HMNY was 636 Million. I have found that Yahoo! tends to have the best-updated numbers on these vital statistics. You can see HMNY stats here. Stock Price of .0225 times outstanding shares of 636 Million results in a $14.3 Million Market Cap. Meaning the “size” of HMNY is quite small. This means that the company is vulnerable to a lot of different potential outcomes. Including a major investor taking a part of the company, an outright acquisition, and market manipulation by big money management firms among other things. Essentially, the company is being valued at a level equal to or potentially even less than the cash they have on hand.
Unfortunately – the story is not quite so simple in the case of HMNY. This is because HMNY has been selling more shares on the open market to fund their losses on Moviepass and as a result, the number of shares has continued to rise. Estimates for the number of outstanding shares now have a really big range from followers of the stock. Some believe that the company has increased the share count to as much as 2 Billion shares. Nobody really knows, and the company is only required to update the outstanding share count periodically. Because nobody knows how effective the company has been cutting costs, or how eager the company is to fund new things – like investments in new films, or other acquisitions. It is anyone’s guess on how many shares have needed to be sold or will continue to be sold to fund the company’s operations.
Whatever the number of outstanding shares now in the market, the Market Cap for the company is low. Let’s take the very worst case scenario – that everyone agrees is unlikely at this point – say the full 5 Billion Shares are now outstanding in the market. That would result in a Market Cap of $112 Million Dollars. (The math here again is 5B * .0225 = 112 Million) . Even in that very unlikely scenario, that is still a low Market Cap for a company that delivered $72 Million dollars in subscription sales the last quarter. And is still very likely on a $200 Million dollar yearly sales/revenue pace. (this assumes the revenue number is going to go down a little bit because of high churn from all the changes)
What this means is that the sales to price ratio for HMNY is also really low. Looking at this metric helps to view the company in a different way. It eliminates the variances possible with the number of outstanding shares. Basically, this metric looks at the “revenue multiple” for a stock. It is very unusual for a fast-growing tech company to trade at a level lower than their yearly revenue or sales number. The S&P 500 average Price to Sales ratio is currently at 2.29. Which is actually historically high. The mean for the S&P 500 is 1.5. So again, if you took a very conservative 1.5 factor to HMNY Sales/Revenu you would come up with a $300 Million valuation. More than double the worse case scenario of 5Billion shares at .0225 or the $112 Million Market Cap. Showing again that a conservative valuation, even with 5 Billion Shares outstanding, would be closer to .05 cents. More than double where the stock trades today! And this valuation would be massively conservative.
Earnings Surprise Quite Possible
HMNY has a massive credibility issue. Nobody believes what the management says. Which is funny, because for the most part the company has done what it said it would do, but investors decided they hated the plan so much they would no longer support it. Mitch and Ted always said they would lose lots of money until they got to 5 Million subscribers. They actually estimated it pretty well, and as Mark Gomes pointed out many times, they stated it all very clearly in their SEC filings. For whatever reason, the shorts had a heyday when the company delivered exactly the losses predicted and punished the stock massively. Ted also made some verbal errors along the way mistakingly calling they ATM a line of credit, which totally freaked out investors, and drove the stock down to near zero. For people who have followed the stock all along, that was a painful and really bizarre period. It is what led to the plan changes and all the confusion around the prior business model. We will never really know if 5 Million seasoned subscribers could have made a breakeven scenario, as the company simply could not get enough funding to get there. Most now believe that was never going to be possible, both because usage was higher than expected, and theaters would not cut a deal with Moviepass to provide discounted tickets or share any revenue.
Now that the subscriber plans have changed Farnsworth has publicly stated that subscriber revenue is now at break even. He said utilization is low at .9 movies per month. We don’t know how much money management has spent on new endeavors, and we also don’t know if the company is having any better success working with studios or other partners to monetize their customer base. From my updated model, it looks at least possible that the company could achieve breakeven or even make a positive gross margin on the subscription business with the numbers provided by Farnsworth. The problem really is one of perception and sentiment regarding Farnsworth and whether investors can trust management to protect shareholders from bad decisions. As it stands now the stock is trading at a discount because so many people have such little faith in Farnsworth, and in the management generally, they simply do not believe the numbers Farnsworth is giving.
This is where a positive ER update, that shows break even on subscriber revenue and shows only a small overall loss for the company, could end up boosting this stock price very quickly. This, of course, does cut both ways, if there are substantially more losses than expected, the company could move even closer to 0.000. I think an ER surprise with upside looks more likely. I think the updated plans that really eliminated the heavy user problem will be enough to change the company’s burn rate massively. Also, Ted is already in so much hot water with pending lawsuits, and SEC investigations, I just don’t believe he is stupid enough to lie about these things, Specifically, he would not say that they have already hit break even on subs. As that is NOT a forward-looking statement, and as such, he is not protected at all with that statement and if it incorrect, he faces even more legal problems. That said, Ted has proven to be a bit of a goon, so he could just be making another stupid mistake or lying again.
Further Dilution May Not Be Needed – Maybe the Opposite
If it turns out that the burn rate has come down to very low levels, and HMNY hits breakeven on the subscription business the stock could be triggered to move up very quickly. Here is how this could work out. If Moviepass shows that it’s subscriber base has value in of itself, that will prove to Wall Street money managers that they have a sustainable asset in the business. I worked on many M&A deals in my past life, and I know this is a fact. If a business has a “sustainable book of business” than it has real value. Even if it is only at breakeven.
There is value in breakeven revenue. The thought process on that goes like this. If we buy this company, it will consistently deliver at least $200 million to our topline revenue number, plus we will be getting a strategic growth asset, some technology, and a well-known brand. This is a standard way of breaking down piece parts of any acquisition type deal.
Wall Street Banks and Money Managers understand all of this very well. This is important because what happens when you have a sustainable subscription revenue business is you now have something that looks like collateral to a bank. It is an asset, like when you take a loan on a car or a house. It has a value the bank can see, and it makes it much more likely that Moviepass can get a loan, or as they say, take on debt financing. They might even be able to get a substantial amount of debt financing. This could have a big multiplier effect on HMNY stock. Here’s why.
First, if the company can take on debt, instead of diluting shareholders, the dumping of more shares to raise operating funds could end, and end quickly. Second, the company could also use debt funds to buy back cheap shares of their stock. This would totally upend the fear of bears who think that the company is setting out to keep diluting shareholders into eternity. A scenario could easily develop where the company is loaned enough money to fund operations and buy back a massive amount of the outstanding shares. This would be a double whammy on the stock price, you could see the share price jump massively in this scenario.
Be warned! The opposite of all of this could also happen. And if you believe history repeats, and you think it will repeat here, you should stay far away from the stock.
This all comes down to a question of what do you believe? Do you think Ted is lying about being breakeven? Or do you think that Ted and Mitch are going to drop an earnings bomb so big it explodes the stock upward? Or do you believe the new product is a loser and subs will never grow again? Or do you think Moviepass is still a good value and will continue to find new customers?
I think Moviepass may finally be ready to turn itself around. I think the current conservative valuation on the company makes it a value play, but not without risk. If I am right, this could finally be an entry point worth making.
Mark Gomes the now infamous HNNY short -who BTW is a great guy – called the Moviepass wipeout every step of the way. Some would even argue that Mark helped accelerate the massive short sell that HMNY suffered. But I think the reality is HMNY and Moviepass suffered more from self-inflicted wounds.
Gomes has largely left the stock behind now and leaves a possibility that the stock could recover if it made certain moves to limit usage and become more of a niche play. In a recent videocast, Gomes stated that he believes HMNY could jump around wildly because of its very small market cap. He also stated that during this period after the big blockbuster season there was much more wiggle room for the company to manage its cash flow. Mark seems to have very low conviction that HMNY would end up bankrupt.
On message boards like Stock Twits, The number of confident shorts also seems to be going down. Both Message Volume and Sentiment ratings are rising as the stock stabilizes.
HMNY was sent to the “Dead Pile” of Wall Street primarily because the model they concocted did a lousy job of predicting how much usage and abuse a small number of customers could inflict on their overall business model. The company did not predict some customers would use their passes simply to use a clean bathroom in New York City, or to find a place to take a quick nap while escaping from work. Put simply Moviepass was being abused by customers – but it was part of the deal and there was little the company could do unless they backed off their original unlimited promise. The company was forced to change its ways to eliminate both abuse and fraud to stay alive.
Now that the abuse has been all taken care of things are starting to look brighter for the company and the stock is starting to stabilize.
Certainly, damage has been done to the brand, and that has been well covered over the past several weeks. But what remains is likely still a valuable asset. If the company does manage to avoid bankruptcy, the minuscule market cap that exists on the stock today will likely create opportunities for the stock to go higher.
It appears that the company is slowly restoring service availability to acceptable levels. More movies and times are being added, and many on social media are coming to the defense of the company and the new policies.
Tomorrow I will write more on how HMNY management could drive a serious recovery to the stock. Including:
- Possible Stock Buyback and why it would make sense
- Why an earnings surprise could be a massive boost to the company
- Why I think most outstanding share count estimates are off, and how that makes the Market cap for this stock lower than many think
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