Many of my readers have reached out to me and asked why I think MoviePass does not get the same kind of valuation other Unicorns receive, or anywhere near what other subscription businesses are currently being valued at in the marketplace.
I, of course, wonder the same thing, and I thought I would put forward a few different valuation scenarios and comparisons to other subscription businesses. Additionally, I have a couple thoughts on why I think the company had a difficult time raising VC funds that would have allowed MoviePass to hit Unicorn status with private funding. But first, let’s look at some subscriptions businesses on the market today and see if we can make any sense of the crazy low valuations MoviePass is suffering today.
MoviePass is often referred to as NetFlix for theaters. Some argue against this, saying that the models are not very similar, or that the market size is not comparable. That said, I think they are worth comparing, both businesses are subscription based, both charge a similar amount per month, and both provide a value proposition of unlimited, or extremely generous, amount of content that can be viewed every month. It is at the very least, worthwhile to consider the valuation of NetFlix in comparison to MoviePass. Even with their notable differences.
NetFlix has a Market Capitalization of $150 Billion Dollars, The company did 3.7 Billion in Revenue last QTR ending in March. NetFlix is growing revenue so I will estimate that they do around $17 Billion for 2018. This means that NetFlix is trading at about 9.4 times next year’s Revenue. Compare that to MoviePass. HMNY had a confusing earnings statement last QTR that showed some crazy revenue numbers based on adjusting their warrants. So I won’t use their reported numbers for this comparison. Instead, I will do a simple estimate based off of my revenue models. For the year I estimate the company will do about $450 Million in Revenue. If MoviePass were to enjoy 9.4 times 2018 Revenue that NetFlix does, the market cap would be just over $4.2 Billion Dollars. Not the ridiculous $34 Million Market Cap of MoviePass today.
Another interesting way to look at Netflix is Market Cap per Subscriber. Netflix currently claims 125 Million Subscribers, meaning that each subscriber is currently valued at approximately $1200! That’s right, every subscriber NetFlix has a Market Cap value of $1200 bucks! Now imagine of MoviePass could receive a valuation of $1200 per subscriber on their 2.7 Million Subscribers. That would result in a Market Cap for HMNY of $3.24 Billion. Again – not close to the $34 Million Market Cap we see today.
I know what many are thinking here, but NetFlix is profitable, and they have been for a long time, and their COG’s are not crazy like MoviePass. Well, actually that also turns out to not be the case. NetFlix is actually spending like crazy, just like MoviePass, to build their subscriber base up. In the past few years, NetFlix has piled on a massive load of debt, now approaching $8 Billion dollars to create and buy exclusive content for their subscribers.
So before you say to my – or yourself, sure they have debt, but they have earnings! OK, fine I will grant you that, they show earnings with some slick accounting, but unfortunately, they are actually burning a heck of a lot more cash than MoviePass is. Look at the cash burn from operations over the last 3 years, and that is likely to increase into 2018. They are burning $2 Billion + in cash, but investors seem to be more than happy with that? I wonder why?
And where are they getting all that cash to burn you might ask? They are financing it! And yes, at some point, shareholders of NetFlix will have to actually PAY for that financing.
Hey – I have no problem with NetFlix receiving a rich valuation for their subscriber base, or a very healthy Market Cap to forward revenue valuation. They are a terrific company and have done amazing things. But doesn’t it seem a little strange that MoviePass can’t get anywhere close to a NetFlix type of valuation? And when I say it is not close, I am talking more than an order of magnitude off. That does not seem like a fair valuation at all.
Now let’s look at Spotify a bit. How do they stack up on some of the numbers? SPOT announced it has hit 75 Million subscribers just this month, they have a Market Cap of $27 Billion, they are on pace to do around $5 Billion in revenue for 2018, and they are also losing boatloads of money -which I will get to here in a bit.
The simple math of Market Cap to forward 2018 revenue estimate puts SPOT at about 5.4 times 2018 Revenue. That multiple applied to HMNY’s 2018 revenue would give a $2.43 Billion dollar Market Cap.
SPOT’s Market Cap per sub value ends up being $320.00 per subscriber. Not as great as NetFlix for sure (But we all know Music is an even worse business than movies) . Be that as it is, if HMNY were to fetch $320 per sub, that would yield a $972 Million dollar Market Cap for HMNY. Now let’s also remember that SPOT has very serious competition with Apple Music and Google, and others. They have little if any meaningful differentiation in the product, and they lose lots of money. So it’s not surprising their valuation would be less than NetFlix multiples, but it is surprising they too would be an order of magnitude valuation higher than MoviePass.
How much does SPOT lose? A lot! Total Net Income for 2017 was negative $1.25 Billion. Yep that is not a mistake – they are losing over a Billion dollars, it makes MoviePass’s $20 Million a month (and going lower) look quaint by comparison.
And how has SPOT managed to keep funding these losses? They raised money with their IPO and they have floated about $1 Billion dollars of debt. Sound familiar? Yep just like NetFlix, they are spending big money on content – in this case music, to drive up subscribers, while losing money and floating debt to get to big scale. The market seems to be liking it and rewarding they move with a nice premium like valuation.
I could go on with other examples of subscription businesses that either lose money, or only break even and have way higher valuations than HMNY is receiving. But what is clear, is something is way way off on MoviePass valuation, and there has to be a reason beyond just the cash burn problem. Why are these other businesses allowed and encouraged to plow through cash to build a big subscription business, and MoviePass is not afforded the same luxury?
I have a few different theories on this – I think combined – these are the reasons that MoviePass, is not getting a pass with Wall St. and never got a pass with Silicon Valley VC’s.
My theory is one that I think nobody has brought up, but it is important in the history of MoviePass and now the present valuation situation the company is in, some may take great offense to this, but I believe it to be true.
Silicon Valley VC’s are racist, it is well known and well documented with reams of data, SV VC’s discriminate against people of color and are sexist, and they are ageist. And what many don’t remember about MoviePass is that it was founded by two African American entrepreneurs, Stacy Spikes, and Hamet Watt. To understand why this is important you have to understand how VC’s work. If you have ever seen the early episodes of the HBO series Silicon Valley, it gives a pretty good and comedic lesson in how things operate in the Valley VC world. VC’s are run almost exclusively by very rich white males, who all go to the same parties, they are all massively competitive with each other, and they pretty much run in herds and participate in group think as they execute their funding decisions. If one VC thinks a company is hot shit, you can go to the next VC and ask for more money with better terms. Momentum is the name of the game, and nobody wants to be left out. Unfortunately, if you don’t get momentum you start to get totally blackballed in the valley. If a VC says NO, and the next one says NO, it gets harder and harder to find anybody to say yes. If you are a woman or an African American looking for funding in the Valley, it is way more difficult to get the funding you desire – no matter how good your business plan may look. That is just a fact.
If you go all the way back to 2014 Spikes and Watts were still running the company, but Mitch Lowe had come in to “consult” and help out the struggling startup. By 2016 Lowe was made CEO, Spikes and Watts were kicked to the sideline and Mitch was moving toward pushing the new scale-up plan. The problem was Mitch also could not find the funding – estimated at $100 million to get to the 5 Million subscriber number that would make MoviePass profitable. Now the next dirty secret of the Valley is age discrimination, it is massive, and also well known and well documented. Mitch Lowe is 65 years old, literally, that is a dinosaur in the valley. Mark Zuckerberg is old to the valley, Serg and Larry of Google, they are fossils now. Finding a VC to bet $100 million on a 65-Year-Old CEO, who was going to take the reigns of a pivoting startup that had previously been run by two African Americans and scale it to a Billion dollar business, it sounds absurd to the SV VC crowd. (I mean it sounds absurd to almost anyone) To make matters more difficult for MoviePass, they had already pitched most of the Valley previously, VC’s are stubborn, cocky, and they don’t like to admit to being wrong. The idea that they would suddenly change their minds on MoviePass when Mitch Lowe took over, it was just not very likely to happen. Yes, I truly believe that racism and ageism played a big role in MoviePass not becoming a privately held unicorn.
That history of racism and ageism is still impacting the story of MoviePass and it’s valuation today. Mitch has told the story multiple times how he tried pitching every VC firm he could, and nobody would fund the MoviePass scale-up plans. Ultimately, that search for money found Ted Farnsworth, the obscure Penny Stock pitchman, with multiple previous 99% wipeouts. Farnsworth bought into Lowe’s vision, and he quickly put his fund unusual fundraising skills to work, essentially betting his company, Helios & Matheson on Mitch Lowe’s big idea. It is worth noting that Farnsworth’s ownership of Helios & Matheson stemmed from a very unusual situation where Farnsworth had founded Zone’s and somehow pulled off a merger with HMNY and Zones, where Farnsworth ended up being the CEO. Everything about Farnsworth is quixotic and bizarre, the guy is an enigma putting it politely.
So now here we sit, with a Senior Citizen in Lowe, who is the CEO of MoviePass, and huckster in Farnsworth, who commands the respect of a turd in the punch bowl from both the Valley money people and commands little more respect from big money Wall St. money crowd. Mix all that together, with a company that was a little too early to IPO, and in fact, really has not officially IPO’d because of a nasty proxy battle, and you can start to put together a good case why HMNY stock is not gaining the respect that the actual business deserves.
You can imagine some of the conversations at the big MM firms:
- Why didn’t any VC’s bet on this thing? I talked to my pal at XYZ VC in the Valley, they said they passed on this thing multiple times, they don’t believe in it, why should we?
- Who’s the CEO? Farnsworth, ha! that’s hilarious – please get out of my office!
- You want me to invest in a company that every single VC firm in the valley passed on, and is losing gobs of money, and has a CEO who wiped out multiple companies in the past? That’s a good one, tell me another 🙂
So you see. MoviePass and HMNY is a victim of its racist and ageist past, it is a great idea, a disrupter that is bringing people back to theaters in droves, a service consumers love, and a potentially great business, trapped in societal problem older and deeper than the theater itself. Should MoviePass die, it would be another tragic case of discrimination raising its ugly head in the worlds of Silicon Valley and Wall Street, and hurting people who love the service on Main Street. That my friends would be a very sad outcome, not just for the investors in MoviePass, but for the country and for the institutions who should know and serve us better.