Well, it appears that Ted Farnsworth lied to stockholders yet again. One day after the special stockholders meeting where HMNY approved bagillion new shares and the approved Reverse Split “up to” 250:1 — the company announced that it was going to move forward with the highest Reverse Split possible and do the 250:1. I am honestly shocked by the announcement. Ted is a special kind of CEO.
Just yesterday, Farnsworth told the audience at the special stockholders meeting that they did not have immediate plans to use the reverse split, and that is was “good insurance”. That turned out to be yet another lie from Farnsworth. I can no longer defend Farnsworth in any way. I think he should be tossed out of the CEO position immediately. I think he is both incompetent and massively dishonest.
I am going to hold on to my shares, but I cannot recommend buying shares immediately post this R/S. The risk of short sellers driving this down another 50% here is very real here, it could happen in a matter of days. I also don’t recommend panic selling the shares you have left. Once the dust settles, the fundamentals can and at some point will come back into play. The R/S does allow larger money managers to buy into this stock, where before as a penny stock it was totally off limits. But unfortunately, not much of that will start to happen until the proxy fight is resolved because many MM’s have strict provisions against buying proxy stocks. So if anybody is hoping or betting on big MM to come in and save the day here, I think that is unlikely to happen until the proxy is totally resolved. Best guess for that is Mid August timeframe.
I have seen a lot of crazy stuff in stocks, this one for sure is the craziest stock I have ever seen. There are a lot of early investors in this stock that will never see their money back. Those that have averaged down to $1 or less have a chance of someday getting back to even, although that seems very remote now.
I don’t see sentiment for this stock improving without extremely positive new news. The news would have to be a major partnership announcement with investment, or a believable major move toward Breakeven – (I no longer think you can trust management in their EOY claims – I am not saying it won’t happen, but I would not bet money on it). Resolved Proxy and Ticker Change will help, but I don’t think it will be enough anymore.
Ted alluded in an industry talk today that they have another major disruption coming that will further turn Hollywood upside down. I don’t believe him. While it is possible that Mitch and Ted have cracked up a new idea, more often than not, when Ted hints at something big coming, it ends up being a lie, or being way less impactful than investors hoped. Ted has repeatedly made false or misleading claims to the press and investors, and he just simply can’t be trusted at all when he makes hints. Everything he says has to be discounted. I honestly believe Ted is a combination of incompetent and dishonesty. It is like playing poker with a rookie, sometimes they make brilliant bluffs because they are simply not wise enough to know any better. This is how it is with Ted, he may be bluffing, or he may be too stupid to know better, unfortunately, it is impossible to know which.
I continue to believe there is real value locked up in this company, and I think that the right leader could come in unlock that value and put the company on a sensible path, the total market capitalization value of this company could go up solidly from where it is today. But there is so much going against the company with Ted and his lies, that I can’t recommend buying it. Nor do I think it wise to sell what you already hold.
Much has been said about MoviePass, its business model, and its impact on theaters and Hollywood. Entrenched competitors like AMC have said that MoviePass is simply unsustainable. We all know the company is investing a lot of money to grow their subscriber base which now stands at over 3 Million. In SEC filings the company estimates it will lose $45 Million Dollars in June of 2018 and “at least” $45 Millon Dollars in July – attributed to increasing subscriber numbers and the hot summer box office season.
Wall Street has been spooked by these numbers, and HMNY has been shorted down to all-time lows again this week, now trading at around $.10 a share.
At the moment, MoviePass and its holding company HMNY are finding it hard to find any constituent group who really loves them.
Hollywood and Theater owners are either indifferent or outright negative on MoviePass and its business model, primarily because they fear MoviePass is inserting themselves in between them and “their” customers. Theaters and Hollywood have found a way to work together, even if it has meant higher prices and less interesting movie choices for consumers, they are at least comfortable with the status quo, and they don’t fancy a new company coming in and changing the game on them.
Customers, on the other hand, have grown suspicious of MoviePass as they have adjusted their plans to reduce fraudulent usage and initiate Peak Pricing to encourage subscribers to view movies other than the big blockbusters on opening weekends. Customers, of course, liked the old deal they had better, and they are not running to the defense of MoviePass.
Investors have viewed all of this with a very skeptical eye. As they say, the only certainty on Wall Street is that they HATE uncertainty. And as MoviePass has burned through cash, declared that it may not be sustainable, and monkeyed around with its core offering, it is keeping the big Wall Street money at bay, and keeping the stock in the toilet.
As I was reading the latest rounds of negative press on the company I ran by this video from the Verge, done by their Entertainment Editor Bryan Ishop.
In the video, Ishop reasons that MoviePass is actually bad for consumers because MoviePass puts downward pressure on pricing that theater owners can’t defend against. Ishop goes on to argue that theaters can’t differentiate by showing different films, and the only way they can differentiate is by offering more premium experiences, things like Laser display, better sound, 3D, IMAX, reclining seats etc. He believes that MoviePass will hurt theaters ability to keep investing in innovation of the theater experience should they not have more direct control over their pricing. In the video, he interviews an executive from a local theater owner in Portland Oregon who says he does not want to give MoviePass a cut of their revenue and feels like MoviePass has inserted themselves as an unwanted middleman.
All of this got me to thinking more and more about if MoviePass is really a disruptive innovator in the classical Clayton Christensen definition, or if it is really just a low-end discounter trying wedge its way into the uninvited territory of theaters and Hollywood. Spoiler! As it turns out, I think both are true.
For those who are not familiar with Clay Christensen, he is really the father of the concept of disruptive innovation, and he wrote the book “The Innovator’s Dilemma” that describes fully the concept of disruptive innovation. It is important to know who this person is, as his impact on American business has been massive, and his models have proven to be universally accepted by business leaders around the world.
Why am I talking about Bryan Ishop and Clay Christensen in the same post here? Because Bryan actually does an incredible job of demonstrating exactly why MoviePass is a disruptive innovator. Bryan is the textbook definition of the “most demanding customer” that Christensen says incumbents will almost always maximize toward. And it is logical because those customers tend to be the most profitable customers.
When Christensen is asked what exactly is a disruptive innovation, he starts by saying what it IS NOT. He says “a disruptive innovation is not a breakthrough that makes good products a lot better” he goes on to say a disruptive innovation “is a product that transforms a product that was historically expensive and complicated that only a few people had access to it” … “makes it affordable so a much larger part of the population has access to it”.
You can watch the entire video here – if you invest in HMNY – I highly highly recommend you watch this video. Clay Christensen was one of Reed Hastings most valued advisors at Netflix, and as most investors in HMNY know, Mitch Lowe the CEO of MoviePass has twice before used disruptive innovation to build Redbox and Netflix in the past.
MoviePass, I believe is taking a disruptive innovators approach, where they are essentially coming into the market on the low end, and by doing so, they are making movies a lot more affordable and available to a lot more people. The low end of movie theater exhibition, in this case, is 2D only, no IMAX, seat reservations only with partner theaters, and some restrictions on premium showings. With MoviePass Peak Pricing, the low end also means that you have to wait to see a new release until after the first or second weekend or pay extra to see it on opening weekend.
As described by Clayton “Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.”
Interestingly, as Christensen well explains in the Innovators Dilemma, the response from the incumbent player is both predictable and logical. AMC almost perfectly demonstrated the response. AMC has logically pursued sustaining innovations, these include improved theater seating, better food, 3D offerings, Imax, reserved seating, & rewards programs targeted at heavy moviegoers. All of this has been logical in pursuing more profitable frequent customers. As AMC pursued the higher end market with more frills, they essentially left an opening for a competitor like MoviePass to enter.
As Christensen puts it “Companies pursue these “sustaining innovations” at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability. However, by doing so, companies unwittingly open the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.” Wow! – that sounds like AMC and MoviePass to me!
What’s wonderful for HMNY investors is new entrants almost always win in the marketplace. Across all industries, the basic theory and formula laid out by Christensen has proven again and again to accurately predict how companies will be overcome by innovative disruptors.
So why then has the stock of HMNY and the press on MoviePass been so negative? Well, this too is actually quite common for disruptors. Amazon, Netflix, and many others were first met with a TON of skepticism before being totally accepted by Wall Street.
There are of course other important differences between MoviePass and Amazon, Netflix.
One problem in particular for MoviePass is that its initial customer base was really a lot of heavy users, who were traditionally served as high-end customers at the theater chains. MoviePass, I believe, gave too much to these customers early on. The deal was really too good to be true, and those customers were very vocal in spreading the word how great it was. Unfortunately, they have been equally vocal as the deal was made more low end, so many of those heavy users are now displeased and they are grumbling on social media, and complaining to the press. For the casual moviegoer, however, MoviePass remains an excellent bargain and will bring many people back to the movies who had given up on it because of the expense, and often that disappointment brought on by paying a high price to a see a movie that was really not very good. MoviePass is definitely expanding the market by bringing people back to the movies, and their data proves it.
There are a lot of other examples of disruptive innovators you can study as well. American Automobile companies were disrupted by the Japanese who came in low and took over the sub-compact market, the steel industry is a great example where mini-mills like Nucor came in at the low-end steel rebar market and slowly moved up higher and higher. Nucor is now the largest steel manufacturer in the world.
So yes – MoviePass is a disruptor, and it is also a middleman, both are true. If MoviePass can survive, and cross the chasm, it will overtake AMC and other competitors in the market, and it will likely grow to a point where it soon has to find a way to defend itself from the next innovator.
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.
Revenue Run Rate
Total Online Audience including Moviefone
Technology & Patents
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>>>
I have been lax on writing about MoviePass for a while, but now that summer heat is here in full force in Eastern Washington I am taking a few hours inside to enjoy some A/C and think and write a bit more about what could be with MoviePass.
It has been an exciting couple of weeks, with new SEC filings that almost nobody can make any sense of, calls for pending doom from going belly up. But IMO the most important and exciting development for MoviePass is the official start of Peak Pricing, or what many are calling Surge Pricing.
It appears from weekend reports across the Internet that MoviePass has done an implementation that is going to be quite good for HMNY stockholders, and ultimately will be very good for MoviePass customers, although many customers are still working through their various stages of grief and going through the old Kubler-Ross Model. If not familiar, there is a well-defined model for how humans deal with unexpected changes, particularly when they are dealing with a change of something they love.
First is Denial – We saw that when the news first came out, there were a lot of people saying it was only a rumor, then there were people saying that MoviePass would not implement it because the backlash would be too much. Well, that all passed, and nobody is denying that surge pricing is here.
Second is Anger – we still have some people in that stage. We have seen a lot of that, especially from the heavy users. Most will get over it, but the anger has been there on full display.
Third is Bargaining- this is normally praying the change away, or trying to find some way to make the change not happen. It is the strong desire to go back to the way things were before.
Forth is Depression – You might think that is a stretch for MoviePass, but when I read comments on the MP Fans site on FB, I think some people really have found some bleak moments knowing that the “too good to be true” free for all is winding down just a bit. Maybe folks are depressed, but some are “pretty bummed out”.
Fith and Last – is Acceptance – Many MoviePass holders have already moved to this, but everyone moves at their own pace. Acceptance does not mean you love it, it simply means that you accept it as the new reality and move on to dealing with it. In the case of MoviePass I know people have moved on to acceptance when they start talking about how they are going to try and avoid Peak Pricing. I see folks saying they will try and buy tickets early in the morning, or see the big movies in the middle of the weak or later on in the lifecycle or whatever they decide to do. When consumers start talking that way, you know they have moved on to acceptance.
Again – different people react in different ways, and people take their own time and pace to move through these things.
So – we have Peak Pricing announced, implemented, and we are slowly working our way through to acceptance with consumers. If you are holding on to the idea that this is going to cause a mass cancellation effect and churn is going to go through the roof. Forget about it! That is not going to happen. Consumers ultimately do what is good for their pocketbook, even if slightly miffed. You need only know that people will drive several miles to save .05 on a gallon of gas. Or people will brave the crowded Costco to pick up cheap paper towels and great deals on meat. Trust me when I tell you, very few people will actually quit MoviePass because of Peak pricing. The deal is still terrific and everybody logically knows that. Remember, sites like facebook, twitter reddit etc, they all have the vocal minority who love to bitch and complain and tell the world how terrible things are, and they make big claims about how they will quit and protest different things. 99% of the time it is just a bunch of noise. I mean if you are being at all realistic, you know that people have issues with Facebook, Amazon, Google, Microsoft, Apple, etc., they have some small vocal minority that throws a fit anytime changes happen, and then of course things settle down, and ultimately more often than not the companies move on with whatever their agenda is. OK enough about that, because Peak Pricing really is not that bad for consumers and they will get that over time.
With MoviePass and HMNY – these steps are quite important. Firstly because often times Farnsworth and or Mitch say something is going to happen, and well, it either does not happen or does not happen quite when or how they said it would happen. So that they actually got the work done and implemented this thing is no small deal.
Again – From what I have been seeing on Facebook, Stocktwits, and other boards, it appears that MoviePass has made a direct hit with their implementation of Peak Pricing. Let me explain.
First- It seems that AMC Theaters are taking direct hits on Peak Pricing, while partner theaters and other non-AMC theaters appear to be seeing less surge pricing. MoviePass is now clearly at WAR with AMC. Mitch and Ted have taken the gloves off and I think they’ve given up any hope of getting a deal done with AMC anytime soon, so now they are going to hit them where it hurts. Ted has been vocal in his jabs at AMC lately, telling The Street that he thinks AMC is trying to put them out of business. Mitch has long been saying nasty things about AMC,
so it is clear that the dynamic duo is more than ready to stick it to AMC as hard as they can. I have seen many screenshots like the one below where AMC is the ONLY theater showing Peak Pricing for a particular location. That is less true in NYC and LA where there is more widespread Peak Pricing. But it seems obvious now that Partner Theaters are going to see lower or maybe zero Peak Pricing, and AMC is going to see a lot of it. The effect of this will likely be that heavy users who really love AMC will likely jump to the more expensive AMC Stubs plan. That is actually a good thing for MoviePass, the more heavy losers (I mean users sorry for the slip up there) that jump over to AMC’s plan, the less money MoviePass has to lose on them. This brings down the utilization rate, which of course is key to getting MoviePass toward that Breakeven goal near the end of the year. This will also punish AMC further, as they will be getting the worst type of users, the heavy users, that are paying $20 a month, who are very motivated to get their full value from the subscription. So from MoviePass’s position, I am sure they are more than happy to bid farewell to those Movie Hogs, and maybe pick them up later as things change over time. Some of the really heavy users are going to be happy to have both the AMC program and the MoviePass subscription, as over -time MoviePass will introduce exclusive benefits that movie fans will find irresistible.
Now onto why Peak Pricing is actually sort of good for consumers, and they just don’t really know it yet. Peak pricing is doing something that no other theater company could do before. It is using variable pricing to smooth out the demand curve. And that IS actually good for consumers.
You see if MoviePass can successfully help theaters to reduce their perishable inventory by changing the demand lifecycle of a film, this will help MP help the theaters to make more money. You have to think about a movie seat like an airline thinks about their seats. Once the plane takes off, any seat without a butt in it is a loss for the airline. Same of course goes for Movie seats. If the movie plays to an empty seat that is a lost opportunity to sell an additional ticket. OK I know that is super basic. But the less basic part is, Movie Theaters make more profit on the tail end of movies lifecycle in the theater. That’s right, movie theaters keep more of the sale on a movie ticket in the last week of a films showing than it does on opening weekend, where the studios take the lions share of the revenue. So if MoviePass can show the theaters that they can actually get people to change their behavior and see movies a week or two into the release cycle this helps the theaters make a lot more money.
So how is this good for the consumer? Well in a number of ways. First, it gives consumers more choice on how to enjoy films in the theater, and do so at a great price. By spreading out the demand, everyone can win.
Second, it gives smaller indie films a much better position to make some money. Take this weekend, for example, maybe wait on Ant-Man, and instead see “Three Identical Strangers” a Movie that MoviePass is promoting. As a consumer, you still get to see a new release, you get to see something maybe a bit more interesting than the movie everyone else is seeing, and it does not mean you can’t see Ant-Man later on in the theater.
By flattening out the lifecycle of blockbuster films, it helps the theaters make more money, it helps the independent movie producers make more money and thus produce more movies for theaters, and thus it helps consumers have more choices of more films, for significantly less money than they were seeing films for before MoviePass.
This is why I think Peak Pricing is the most significant move yet by MoviePass, and why I believe ultimately anyone who loves movies, or anybody who has invested in HMNY/MoviePass will look back at this weekend as a watershed moment for the success of MoviePass, and a very direct hit on AMC.
One of the great things I have found since starting this blog is that it is a great way to meet new people. Most of the people I have met are quite interesting, have successful backgrounds, and have a high level of expertise in their respective areas. Aside from the occasional troll, the vast majority of people that I have communicated with have been great, well-meaning people who simply want to exchange ideas and thoughts about MoviePass, retirement, investing or other topics that I touch on here and there. Mark Gomes is one of the people I met through this blog. Mark and I started exchanging thoughts and ideas around MoviePass several months ago. And as some of the people who follow us know Mark and I did a debate online where we shared our respective opinions on MoviePass and HMNY.
Before doing the debate with Mark, we spoke at length about Mark’s background, about life, about our investing ideas and strategies. We found that we shared more things in common than we differed. I always find it interesting that more often than not, if you really try to understand a person and understand their personal journey, you will find that you can find many common threads that bind you. I found that to be quite true with Mark, as we shared a story of early retirement, the desire to give back something to the world, we both feel very fortunate and blessed with where we are in life, and like any lifetime spent working, we had our share bumps bruises and battles along the way.
One bump that Mark has on his record is a dust-up with the SEC. Specifically, Mark was served a cease and desist order based on what the SEC saw as a series of pump and dump trades. Mark settled with the SEC, as part of the settlement he was barred from working in the financial industry for 5 years. (at least essentially barred – you can read the specifics in the filing). I talked to Mark about this entire episode at length. I wanted to make sure I was doing my DD before agreeing to do anything publicly together, so I wanted to get the full story from him about what had happened between him and the SEC.
Like any story, there are two sides to the Mark Gomes and SEC story. Personally, I am not picking sides here, but I do believe that Mark’s side of the story stands up pretty well. Let me explain a bit of Mark’s history and I will get into why I believe Mark deserves the benefit of the doubt, and further why I believe Mark is a very good analyst.
Mark’s history started out as a grunt at International Data Corporation (IDC) – Funny enough, Mark and I had similar grunt jobs, being essentially fax boys back in the old days when fax machines were considered expensive and essential equipment to running a business. Mark was savvy and smart enough to start helping out doing research, learning what needed to be done, and eventually climbed his way up to being a very respected senior researcher for IDC and later AMR research. His career working for those two respected companies lasted for 10 years, from 1994 to 2004.
Mark then decided to break out on his own. He has an entrepreneurial spirit, and he could see an opportunity to take his craft and make money providing research to various hedge funds utilizing his knowledge and contacts in the industry. Mark started a company called Pipeline Data LLC and ran that from 2004 to 2009. Mark then semi-retired, did some volunteer work. He also kept busy doing some blogging on Seeking Alpha.
Then according to Mark’s story, he had a close friend who was diagnosed with breast cancer in 2013. Apparently, this friend did not have a lot of money, and Mark wanted to help her out. Mark told me he would have gladly just written a check to his friend, but the couple he was trying to help had a lot of pride and did not wish to take any handout. So Mark offered to do a partnership with his sick friend’s husband to create a new research firm. Mark was going to do the research work and lead the analysts, and the friend was going to do the website and do promotion of selling the premium research. Essentially the premium research was early access to Mark and other analysts calls on certain stocks. The company was named PPT research.
Again, according to Mark, he discovered in 2014 that his partner (the sick friend’s husband) had done some nefarious selloff of the company’s assets without his knowledge or permission, he also found out that his partner had made some errors in clarity on disclosure that Mark felt was going to be bad for the company. Mark, of course, felt burned by all of this and took steps to back away from the company and start shutting it down.
In 2015 the SEC started an investigation of PPT Research. They alleged that PTT Research’s disclosures did not properly inform investors of their trading practices/intentions. They also alleged that PPT’s newsletter service was in actuality acting as an unregistered investment advisor (all investment advisors must be registered by law). That investigation was ultimately narrowed down to determine whether Mark himself was releasing stock reports with the sole intent of scalping – pumping a stock’s price up to profit by immediately selling the shares at a higher price.
As part of the investigation, the SEC requested every article Mark had written and compared them to the nearly 5,000 trades he had made. He was also hauled in for an 8-hour deposition at the SEC Miami office. In total the SEC looked at approximately 400 different stocks were involved. Mark’s attorney warned him that the SEC could seek millions in disgorgements and penalties, along with possible imprisonment in the event that Mark gave any false testimony or information during the investigation. So Mark was motivated to prove his case!
Through a long process with the SEC, they narrowed down from the original list of near 400 stocks, down to 4 stocks that were still considered to be in question. Mark’s lawyer argued that 99% of the trades in question were found to have no wrongdoing. And that the remaining 4 stock trades in question could likely be explained by coincidence alone. Mark shared with me that he could have mounted a very good defense for the remaining 4 stocks, and he felt he had documentation and a good case. Mark explained the few trades in question to me, and I must say, he has the details, timestamps, and good reasoning for why he made the trades when he did, and how those actions did coincide with his research in a way that most traders would accept as ethical. (Note – I am NOT a trader, I am a long-term buy and hold guy, I don’t trade daily news events, and I only buy a stock if I feel like I can stick with it for many years – so I can’t really speak for how heavy traders would feel about Mark’s work with 100% confidence and conviction)
Mark consulted with his lawyer and ultimately decided that it was a better decision for him to put the matter behind him, settle and pay the approximately $275,00 fine to the SEC.
The logic was that it could have cost him several times that amount to fight the battle in court. And when fighting a branch of the US Government, you are battling an entity that has essentially unlimited resources to throw at you.
The SEC is like any government agency, they have a certain number of cases they have to get through, and they basically throw the book at you, and hope to settle. They want their money, and they want to make it appear as if they are getting results. So you are best to stay out of their crosshairs. Mark learned a lesson on all of this. And you will see how very careful Mark is on his disclosure statements if you look at his site or any of his material or research.
So like many stories – it helps to hear both sides. With context, it seems obvious that it would not be at all wise to write off Mark as simply a pump and dump artist with a bad SEC record. Mark does detailed research, he believes in his methodologies, and he has been schooled and trained by some of the best in the business. I am confident that Mark is right on his trades more often than he is wrong. Beyond that, Mark is a decent guy, and impressive in other areas of his life. He is a world-class accomplished track and field athlete. He made a dream comeback to win the 400 MeterTrack & Field Championship Masters event while shedding 50lbs in preparation for it. And he holds the World Record in the event.
I have had the privilege to work with a lot of really smart and amazing people throughout my career. And IMO Mark stacks right up well with these A Type personalities. He is very intense, highly driven, and one of those people who you don’t just “turn off”. They are always doing something, they don’t like to be bored, and their minds are always going. That may have got Mark into some trouble – that intensity can do that to a person, when you are a fully charged one-man wrecking machine, you have to make sure those powers are used for good and not evil. I think Mark took one on the chin with the SEC, and I have seen that kind of thing before. It is not making an excuse for him, and I am sure Mark learned his lessons
I learned a few things from Mark and was reminded of a few things I already knew. In my passion for Moviepass and the opportunity for HMNY, it would have been better for me to have slowed down and head some warning on the fears of dilution that Mark was banging his fist about. I knew that the company was going to raise money through secondary offerings, but what I did not know was how wildly negative that market was going to react to those events. I don’t blame Mark in any way for pointing out the risk of the ATM and the dilution. And, I don’t believe either Mark or I have the power to materially move HMNY stock over the long term, or the short term. What I do know, is Mark’s experience and his research told him that the dilution would spook Wall St. He was right about that. Mark has called the stock moves & trades of HMNY almost to a tee. So much so, he is probably on the SEC’s short list of who to go harass over the unfortunate and huge declines that stock has suffered. I don’t believe Mark has any insider knowledge at all, he was just calling things as he saw them, based on his experience, and his knowledge of Wall St.
I could have found a better entry point to this stock had I been more open to Mark’s viewpoints.
I remain a committed bull on MoviePass and HMNY. But I sure as hell would rather have started my investment at $0.18! At this point, I think Mark is wrong on his call to further short the stock. I think the stock is basically priced to go out of business, and I don’t think that is going to happen. This stock has been on death watch for a couple months now, but really shows no sign true sign of rolling over completely.
I am glad for having met Mark, and I hope we can continue to talk about stocks, stress test each other’s ideas, and keep doing what we both like to do.
I hope by reading this, you learn a bit more about Mark, and when you see people (trolls) bashing him, you think twice before dismissing his POV.
My hope is that Mark switches over to the bull side of HMNY soon, and we can ride this together to great gains!