What the heck is going on here! Is MoviePass really going BK?
May 9, 2018
The past couple weeks have been admittedly rough for HMNY investors. I have continued to stay long, but I have not been enjoying the ride much. My time horizon is multiple years, and I still believe longterm MoviePass has a very good chance of not only surviving but thriving. Today was particularly ugly with the 8K filing that set off alarm bells for longs and gave shorts another day in the sun to predict near-term doom for MoviePass. AMC’s CEO Adam Aron bashing the company and spreading more FUD, also did not help matters much either. The mainstream press seized on the 8K filing, and went for blood with scary headlines predicting near-term bankruptcy.
Spoiler – I do not think MoviePass is headed for Bankruptcy. I still believe the MoviePass model can and will work. I have said it before, MoviePass really should not be a public company yet. And in many respects, they really still are not fully a public company. But by Proxy – via HMNY they are close enough. At least for retail investors who have wanted to get a piece of the action on MoviePass’s business.
I am pretty sure there are a whole lot of HMNY investors who are kicking themselves right now. Wishing they had stayed away from this stock, and who could blame them given the rapid descent of the stock price. So far, the bears have been right, and shorts have made good money betting against MoviePass.
I still believe we are in very early innings for MoviePass. And while I think it is problematic for the company that shares have dropped to this low level, I don’t think it is a catastrophic situation. The short attack on the company has undoubtedly been successful, and it has put the company in a more difficult position for raising funds. There is no way to escape it, this makes things harder for MoviePass. Selling shares on the cheap is a rough way to raise money, and convincing lenders to fund further sub growth will be difficult and expensive given the scary headlines. I expect to see this narrative linger for at least a few months. Maybe until the end of the year. Yes, it will come with dilution, and it could also come with share price staying under pressure.
I don’t see bankruptcy as a likely outcome here. The primary reason is that the company has no debt. So really only HMNY management can decide if they want to try and take BK route if things get that bad, but by doing so, they gain very little. Hell, at this point, even the whining about Farnsworth’s market cap incentives seems wildly misplaced. At the current market cap of about $78 Million – Farnsworth will get exactly ZERO from his market cap bonus structure. At this point, I would love to see nothing less than a 100% payout to Farnsworth if he can hit these goals!
I continue to believe that Farnsworth and Lowe have a LOT of levers they can pull to further reduce the cash bleed, while still maintaining reasonable subscriber growth. Do remember that the MoviePass terms of service give the company a lot of options for changing the service in any number of ways. Removing the ability to see a movie more than once, and forcing photos of ticket stubs were successful in bringing ticket COGs down by 35% – I believe the company can go even further to reduce COGs.
A few ideas for further reducing COGs
Have one day a week where only partner theaters are available for MP subscribers. This would give a great bonus to those who are playing nice with MP, and it will sting the chains who don’t play nice. It would also reduce consumption 4 days a month. I think they could do this without infuriating the subscriber base. MoviePass just needs to be open and honest with subscribers, and communicate with them upfront prior to making a move like this. People LOVE their MP, and if well guided, they will help do their part to keep the company in business.
Block opening weekends for more big blockbuster films. I know many will howl at this, but I contend that a very large number of MP customers will not care if they have to wait 2-3 days to see the big BB film. By doing this, it will reduce some consumption, and will also offer more value to chains, helping them fill more seats that would otherwise go unfilled as perishable inventory.
Cut off some AMC theaters where there are obvious good alternatives – if a deal can be struck with competitors Regal etc. AMC is trying to kill MoviePass with a smear campaign, and playing hardball here will be understandable by most MP customers. Again, MP needs to step up the PR machine here and get the customer on their side. They are just not doing enough to make their loyal customers part of the solution.
Encourage Customers to be part of the solution to reduce costs! Ask loyal customers to frequent matinees when convenient, use MP like you would use your own money. Honestly – I think a lot of customers would be happy to help if it means the company stays viable.
There are other much more draconian ideas we could all think of to reduce costs, but obviously, the company does not want to take any measure that will kill its ability to scale. That said – if the decision is BK or more draconian cost reductions, particularly to slow down the heavy users – MOST will accept the draconian measures over BK. And remember, 88% of the subs are not a problem, we are only trying to slow down the hogs!
Simply start kicking out the heavy users. If they are month to month users, don’t renew them. Offer the heavy user a $29.99 plan. I think about 1/2 would take it.
Start restricting the movies that heavy users can see. Limit their options and limit the theaters they can go to. Yes that sounds harsh, but to avoid BK, MP may need to start getting harsh with the hogs!
The point is – there are a LOT of levers, and a lot of options for MP to stay in business and provide an excellent value to the vast majority (88%) of their customers who do not drain the bank every month. Making the talk of any near-term BK very unlikely.
Things are not quite a pretty as they were a couple months ago. The share price has fallen far below where I thought it would fall. But I think the story still works, I think the business model can still work with some tweaks. I have not given up.
Finally – if you believed that MoviePass would work from my previous models. Which of course I do believe, than you should now love the stock even more after MoviePass has successfully implemented the cost reductions they now have in place.
From the NY POST article today:
Farnsworth, however, disputed AMC’s figures, saying MoviePass members had actually visited the chain an average of 1.8 times in April.
He added that MoviePass has slashed that number to 1.13 since it began cracking down on users who have been sharing their memberships and watching the same movie more than once.
“Anything below 1.5 for us is great, because you can make it up with other revenues” from marketing deals and other corporate tie-ins, Farnsworth told The Post.
I understand a lot of people are scared, and they don’t trust Farnsworth anymore, and I can’t totally blame investors for that. However, if pressed, I find only a very few things where Farnsworth has not been totally clear, and I have not seen flat out lies. Missing projections does not equal a lie – BTW. That is why they call it an earnings miss. Not an earning LIE. They are guesses at the future. Is Farnsworth a bad guesser? Maybe! Has he been wrong with other businesses in the past, yes. Does he deserve the benefit of the doubt when he speaks about MoviePass now, only you can decide. But if you truly don’t trust the CEO and think he is a liar, I would avoid the stock anyway.
So I have an updated model on the model page with 1.13 Utilizatoin rate. And that looks very promisting indeed. It all depends on who and what you want to believe. That hasn’t changed!