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>>>

 

 

 

 

MoviePass Valuation Comparisons to Other Unicorns

After watching this most recent YouTube video of Mitch Lowe being interviewed specifically on details around MoviePass’s ability to survive, I kept thinking to myself how ridiculous it is that the valuation for HMNY is so incredibly low.

As the interviewer points out in the video.  MoviePass is essentially priced like a company that is going out of business.  Mitch does an excellent job defending the value of MoviePass.  If you have not watched the video yet and you invest in MoviePass/ HMNY, I highly recommend viewing it in its entirety.  At one point in the interview, the guys both get real and fully acknowledge there is some real value in what MoviePass has accomplished to date.  It is damn hard to get 3 Million people to hand over their credit card and say “bill me” every month for a service.   There are a LOT of companies that will find this group of consumers very attractive.   So if it comes down to is there value here, in the case of potentially an acquisition, the answer is clearly YES!

Also, it was clear, that if MoviePass wanted to turn profitable in a hurry, they certainly have to the means to do it now.  Mitch revealed 12% of the MP users represent 40% of the cost.  With Peak Pricing now coming, it will be fairly easy for MoviePass to essentially kick heavy users out, or tax them to a point where they are no longer a problem.   As I have said for a long while, MP has all the levers it needs to control its own destiny, and it seems clear that they are intent on doing so.

It has been such an odd situation to watch the value of HMNY/ MoviePass drop so low while other private and public Unicorn companies continue to raise money via VC capital and debt financing,  And do so at incredibly large valuations.   I felt like it would be a worthwhile exercise to look at some well known Unicorn companies and compare some key data points.  These companies share a lot of similarities, they are building disruptive new business models at large scale, they are competing with entrenched incumbents, they are spending capital and incurring losses to build these new businesses.

The numbers here are a little rough, I scoured the web to get as accurate as I could, and because all of these companies are growing very fast, and they are either private or just recently public, it is hard to get precisely accurate data.   I think what I have here is reasonably close for each company, and it works well for comparison to MoviePass.

If you look at the comparisons what will jump out to you is a few things.  First, the market is currently valuing MP at almost nothing, it is assuming MP is going out of business.  As I have said before and will say it again, MoviePass is not going out of business, and they are NOT going BK.  Second, while it may sound scary when we here about the need for potentially over $1B more of capital to get MoviePass totally off the ground, by comparison, MoviePass has built a great revenue stream on relatively little capital thus far, way less than many other Unicorn companies.   And the total expenditure of capital is certainly not out of line with others who have market caps that are very generous.   There is also the constant fear of dilution that overhangs the company.  Will they really need to issue a billion shares or more, swamping the demand side?   It is possible that these fears, even if irrational, and only temporary could continue to depress the stock until the company shows a more clear line of sight to breakeven, or the sentiment for the company and its stock improves.  Those two things could be integrally tied together as well.  Only time will tell.

When looking how far the comparisons to other Unicorn diverge, it doesn’t make much sense, and I fully expect to see some revision to the mean here.   By that, I mean that I fully expect to see MoviePass move up closer to the valuation of other Unicorn companies within some reasonable timeframe.  I believe that this will likely happen toward the end of this calendar year, or sometime into the spring of next year.    I am not predicting any specific price, and this reversion to the mean could take longer.   However, I firmly believe the market is rational in the long term, and these great divergencies won’t continue.

Of course, you could also argue that these Unicron companies themselves are seriously overvalued, (many do believe so) and we could see valuations move more toward MoviePass.   I don’t believe that is going to happen, at least not in any major move.  This is different than the old Dotcom blowout of the 2000’s, these are real companies, and they are creating real value in what they do.   It is the incumbents who need to worry more than any other group.  Old firms like Merrill Lynch will be disrupted by new entries like Robinhood.   Taxis and other transportation companies will be disrupted by companies like Uber and Lyft.   Theater chains like AMC will be disrupted by MoviePass.  etc etc.

Here is the link to some interesting data and comparisons looking at ARR’s, VC Funding Totals, Accumulated Loss Estimates, Market Cap Evaluations and a few more things.   Take a look yourself, and ask yourself, shouldn’t MoviePass be worth more than a single Costco store?

If you don’t want to click to the sheet – here is a embedded one.  Sorry I could not get the formatting to work perfectly.  Again, you get what you pay for!

Steve Jobs Predicted A MoviePass Like Service One Year Before Passing – He Saw The MoviePass Business Model

One year before Steve Jobs passed he predicted a service like HMNY’s MoviePass would change how studios market their films. Now 8+ years after the marketing genius’s death, MoviePass stands.

Now 8+ years after the marketing genius’s death, Moviepass stands to deliver on Job’s prediction that technology would allow studios to efficiently reach audiences reducing their spiraling marketing costs.

At only 10% share of Studio Marketing budgets, Moviepass could stand to reap $230M a year in revenue from Studios. 10% is a conservative estimate given the efficiency of Moviepass.

Way back in 2010 Steve Jobs predicted at an industry conference a change from technology would emerge that would fundamentally change the way movie studios go to market and connect with their customers. His prediction was early, but is now being delivered via MoviePass.

Jobs stated “What the studios need to do is start embracing the front end of the business,” he said, “to start knowing who their customers are, and to start building mechanisms to communicate with them, and tell them when their new product is coming out.” Within two years, the Apple CEO predicted, selling films “is going to get a lot more interesting, more precise, cheaper, efficient.”

Jobs’ vision is now being precisely played out by Mitch Lowe, CEO of MoviePass. MoviePass is the ONLY service that can deliver the exact value Jobs prescribed.

MoviePass know’s their customer, in a way studios have never known who their customers were before. MoviePass can deliver a precise, efficient, and cheaper mechanism to get butts into movie seats, previously unavailable to studio marketing chiefs. And yes, they can do it in a way that is more interesting and exciting to the coveted millennial audiences studios are desperate to connect with. Only MoviePass can tell studios exactly who is going to their movies, and reconnect them with sequels, sell them add on products and introduce them to similar films. And only MoviePass has the power to do this on their mobile app platform, knowing the precise history of the users previously viewed movies, locations and times.

Mitch Lowe stated in his interview with Peter Kafka of ReCode

“..we have all these different ways that we make your life better as a customer. We know how to market films to you. You know, the studios are incredibly inefficient the way they market small films. Over the last three weeks, we bought one in every 19 movie tickets in the country, but when we promote a film, we’re buying one in 10, so we’re lifting. These are for subjective $50 million box office films. The studios are paying us to be a more efficient marketer of films.”

MoviePass is a dream come true to Marketing executives who knowingly waste billions every year on big TV advertising binges trying to ensure that big budget films don’t go bust at the theater. An increasingly big risk in the crowded movie marketplace, that has been seeing reduced attendance. MoviePass stands to be the single best way to ensure that a movie does not fizzle out in the all important opening week.

According to Variety Magazine,

Marketers know the power of digital media, but also are becoming more cognizant of its limits. Several executives say they are not convinced, for example, that trailers posted online aren’t just as readily avoided by consumers as are TV ads skipped in the age of the DVR.

“You only know for sure that the consumer saw the first second or two of your trailer. After that, it’s unclear,” suggests a marketing consultant. “And was the volume even turned on? We don’t know. We need better verification of who is really watching and hearing what.

MoviePass – is similar to – but better- than Google keywords for movie studios.  MoviePass takes all the guesswork out of connecting directly with prospective theater goers by utilizing their deeply personal and engaging mobile platform. Simply put, there is no surer way for studios to drive customers to movies than using MoviePass as marketing partner.  If and when MoviePass hits their 5 Million subscriber goal they have predicted to hit by the end of this year, that power of connecting to large scale theater audiences only continues to grow.

It is important to note, that MoviePass has already been extremely successful extending out the all important opening week for many movies as of late.  CEO Mitch Lowe shares details in his interview with ReCode here.

In that same interview Lowe answers Kafka’s question of-

“What’s an example of a movie that the studios have paid you to promote?”

“I could list a bunch of them. “Maze Runner” is one over the last couple of weeks. “Lady Bird,” “I, Tonya,” almost every film …”

So it seems that MoviePass is already enjoying success promoting films for studios.  We don’t yet know how much those deals are earning MoviePass, and it has been reported in SEC filings that many of the deals are performance based.  Meaning that MoviePass gets paid and bonused on the number of actual tickets they help to sell.   We will find out soon how material this is to MoviePass earnings, but because MoviePass is still private, (HMNY) has no right or even any good reason to share these details.  I think we all may end up surprised by how big this advertising business can be.

MovieFone acquisition ups the anti on MoviePass advertising business potential.

When HMNY bought MovieFone – they upped the anti for their advertiser value proposition BIG TIME.  The addition of MovieFone brings MoviePass 6-8 Million additional monthly UU’s to market films to.  Taking the total addressable market for MoviePass advertisers to someplace near or above 10 Million people.  Additionally, the deal cut with Verizon to by MovieFone allowed for MoviePass to continue working with AOL’s Oath division for ad sales.  This is a big win for MoviePass because Oath has the largest display advertising salesforce in the business.  Oath sells ads for all AOL properties, Yahoo, and Microsoft.   This is a big benefit to a small company like MoviePass who would not be able to afford to build their own large salesforce early on.  Having worked in this space, I can tell you that getting a large company like Oath to agree to sell inventory for a small site is very hard to obtain.  When I was at Microsoft and we had a large ad salesforce, we were constantly asked by smaller partners to sell their inventory for them, but we would not do it because it created sales and channel conflicts for our own inventory.   This may sound like small details, but I can assure you this stuff is critical for building a large ad business.

It is estimated that as much 1/3 of revenue for a movie is achieved in the first week of a movie’s release, and further, it often can determine if an expensive film makes or loses money for the studio. This fact, along with tight windows that can’t be moved for movie release dates is what forces movie studio executives to spend $100’s of millions of dollars to “ensure success” of big budget films.

A quick look at the potential revenue MoviePass could score from this powerful marketing asset reveals a potential big windfall for HMNY the majority owner of MoviePass. It is easy to believe that when MoviePass hits its estimated 5 Million subscribers by the end of the year, they could nab a 10% share of total marketing spend, estimated at $2.36B. Or $230 Million in revenue conservatively estimated. MoviePass CEO Mitch Lowe has previously estimated a potential of $6 Per Subscriber Per Month. Simple math of 5M Subscribers X $6 = $30 Million a month, or a yearly revenue run rate of $360 Million. This revenue source could easily be delivered at a Gross Margin in the 90% plus range.

(Source Variety.com)

Put simply, within 20 months, MoviePass + MovieFone has the potential to deliver a quarter billion dollars in run rate revenue from studio marketing budgets at incredible gross margins.

Remember, that Mitch Lowe, CEO of MoviePass has stated that the subscription business would run at breakeven at approximately 5 Million Subscribers.

My model shows that is indeed possible for MoviePass to breakeven or profit by next calendar year.