THIS Is How To Calculate If MoviePass (HMNY) Is Worth Buying

I’ve been keeping up with the MoviePass (MP… or HMNY) fun on Seeking Alpha… but as you know, I no longer participate there.

While a few authors have been doing a great job of covering the latest news, I haven’t seen ANYONE properly address the most important issues as it relates to MP’s future profitability.

Specifically, in the long-term, the “end game” is ALL (100%) about CAC, LTV, etc. Basically, we need to calculate / estimate the lifetime revenue per average customer (plus partners) and subtract the lifetime cost to support the average customer.

So, here’s how the bull versus bear debate should be structured:

  • In the long-run, MP will earn $XXX over the life of the average customer and spend $YYY supporting them.

    XXX – YYY = Profit Per Customer (ZZZ).
    If ZZZ is a positive number, multiply by the number of subscribers and value the company accordingly. If ZZZ is a negative number, they’re dead.

    Remember, we’re doing LONG-TERM calculations here. The CURRENT calculation of ZZZ is of course negative right now, but it’s the long-term (endgame) ZZZ that matters.

    So, let’s investigate that…

     

  • Based on MP’s publicly-stated attrition rate (4%/month), the average customer will be a customer for 25 months (~2 years). Based on their pricing structure (accounting for things like annual pricing and Costco’s cut), I estimate they’re getting about $90 per customer per year.I think that will rise to $100 per year (use your own number to arm yourself for debate), so MP will generate $200 over the life of the average customer, from the customer. That’s a fixed revenue stream.Of course, that leaves one month unaccounted for (25 months = 2 years + 1 month). I’m going to be generous and say that one month of revenue will cover their cost to support these customers, making the $200 a pure fixed profit stream.

    MP will ALSO generate a variable profit (or loss) from its third-party dealings (theaters, studios, etc), which will vary based on how many movies the customer goes to see.

    In my “Ultimate Bullish Dream Scenario” that looks like this:

    * MOVIE TICKETS…. a $10 COST per movie (a bit higher than the national average)

    * THEATER “ROYALTY”………….. a $2 BENEFIT per movie, if we assume that they stop supporting every theater that doesn’t give them 20% of every ticket (which would of course impact their long-term penetration rate, and therefore potential). In this part of my Ultimate Bullish Dream Scenario, they get 100% penetration and a 20% cut of every ticket.

    * CONCESSION REV SHARE……… Yes, I was generous to assume that they’ll get $2 from every theater, but you won’t convince me that they can also get concession $$$ from every theater too. If the business model works that well, the theaters will eventually reach a point where it makes sense to band together and form their own MoviePass to cut out the middleman.

    But if you want to argue it, here’s how:

    MP increases concessions by 120%. Concessions are typically 50% of ticket revenue (about $5 per movie), so the 120% uplift will make concessions = $12 per movie. If you want to argue that MP will get $2 of that on top of $2 per ticket, you’re free to do so. All opinions are valid (though not necessarily correct… or sane). LOL.

    In the Ultimate Bullish Dream Scenario, this = a $2 BENEFIT per movie.

    * STUDIOS…………… Management rhetoric is already clear that MP is viewed as advertising by the studios and appeals mainly to smaller-budget films. This is because the major studios spend most the majority of their advertising  $$ on TV ads (the exact data is public knowledge, so arm yourself with the facts before debating anyone on this!).

    The bottom line is that the big studios (for the most part) are NOT going to give MP royalties, because there’s no way to know if the MP customer would have gone to the movie anyways (and for most blockbusters, the answer is YES, the customer would go to the movie with or without help from MP). So, it’s more likely that MP could get some fixed advertising from the big studios, but that would be a small fraction of their total budget (AGAIN, do your research on this — I already have and don’t feel like writing another 2 pages of content to explain it.

    This is why Mitch and Ted have been talking about their attraction to the smaller studios. With those movies, Mitch said they represented 1 in 10 tickets sold over the past 3 weeks for movies that they pushed to MP customers. This is versus 1 in 19 tickets sold overall. In other words, MP can roughly double the attendance for a small budget film. This is likely because small budget films don’t have the $$ to spend big on TV advertising.

    Regardless, it’s a good thing for MP.

    Unfortunately, major movie studios represent about 80% of tickets sold in the U.S. (the top 5 alone represent over 70% of sales). If MP earns the business of 100% of the non-majors and gets $2.50 per ticket (a very generous 50% of the studio’s share of a $10 ticket sale), they’ll be getting an average of $0.50 of royalty on each ticket they purchase (since 80% of tickets won’t earn them a dime).

    If you think they’ll get 50% of the minor studios’ royalties AND still get advertising from the majors, consider this — studios make about $5 per ticket sold, which goes toward recouping their cost to make/advertise it (and the rule of thumb is that they spend 50% making the movie and 50% advertising it). If we assume that they break even on the average movie, they’re spending $2.50 per ticket on advertising.

    Again, most of this is TV advertising. When I did my research, I was shocked by how small a piece of the ad pie MoviePass is truly in contention to win. They’re competing against every TV channel, every social media outlet, every website, every billboard, etc. Ultimately, I thought it would be a runaway miracle if they could get more than 1% or 2% of this pie. That’s $0.05 per big-studio ticket at most. That’s not being biased (if that isn’t already clear from the tone of this article). It’s being honest.

    I was generous on the $0.50, so I’ll be stingy on the $0.05 and say that MP can eventually get a $0.50 BENEFIT from the studios.

    (see https://bombreport.com/articles/when-does-a-movie-break-even-at-the-box-office/ for some good info).

    So, so far, we have MP spending $10 per ticket and getting $4.50 back from their biggest / most obvious opportunities. I’m open to ideas, but I don’t see how they can get this number much higher.

    Yes, they can MAYBE strike deals with local restaurants, Uber, dot dot dot, but 1) if I spend 120% extra ($12) on concessions, I’m probably not going to spend much after the movie (less money in the wallet; less room in the belly)… and 2) would Uber really give MP a cut of their already low fees? If you think so, WHY??? It’s not like MP can convince me to not take an Uber (and good luck switching me to another ride-sharing service).

    I’m open to ideas, but I don’t see how I can give them credit for more than another $1.50 of BENEFIT,  even in my Ultimate Bullish Dream Scenario… but I’ll still give them the $1.50, giving us a GRAND TOTAL of $6.00 recouped from each $10 ticket sold.

     

  • That’s a $4 LOSS per ticket purchased in my Ultimate Bullish Dream Scenario… but that’s not necessarily a bad thing. Remember, they’re making $200 of lifetime subscription revenue from each customer!So, we have to calculate how many movies the average customer will attend over their 25 month life…
  • If those customers do as MP originally believed / stated (more on this below), the average customer will attend about 6 movies in the first three months, 3 in the following 3 months, and 9 in the final 18 months of their 2 year membership.That’s a total of 18 movies, generating $72 in losses (18 x $4 loss per movie).So, in my Ultimate Bullish Dream Scenario, MP will earn $128 over the life of each customer. That’s not the $500 that many have been talking about (those people obviously haven’t done the math — they just assumed that MP is NFLX), but it would be VERY BULLISH for the stock.

 

But not so fast, bulls. We have a problem here.

First of all, this was the Ultimate Bullish Dream Scenario. In a more reasonable (but still bullish) scenario, I think MP would get closer to $3 than $6, creating a per-movie deficit of something closer to $7 than $4.

18 movies x $7 = $126, which leaves a lifetime customer value of $74 ($200 – $126 = $74).

Still great!

BUT HERE COMES THE “BUT”…

Of course, that was the bullish (and ultimate bullish) scenario. The bearish scenarios would surely have them generating something closer to $1 per average ticket, creating a $9 deficit. Of course, 18 movies x $9 = $162, which still leaves a $38 lifetime profit per customer. However, what will happen to the attrition rate as customers come to realize that they’re paying $200 to go to 18 movies (only $180 worth).

Yes, many will keep paying because 1) the MP will give them the kick in the @$$ they need to get out of the house, or 2) people don’t do math or, 3) insert your argument here… but no amount of arguments will account for everyone. Some (large) % of customers will non-renew after one year, as they realize that their usage has dropped from 3 movies per month back down to 0.5 (which is required for my 18 movies per subscription life to work).

But it’s worse than that.

In his most recent interview, Mitch said that MP bought 1 in 19 tickets over the past 3 weeks. In one of my recent blog postings, I did the math and that equals about 3 movies per customer per month. Why is it still that high if only the first month is supposed to be 3 movies? Half of all MP customers have been on board for months and should be down to 1 per month, driving the average to something closer to 2 movies per month by now.

I’ve used multiple methods to calculate this and each method tells me that usage has been 50% higher than I expected. If that’s the case, we have to multiply all the losses above by 27, not 18. That would drop the bullish scenario down to about $10 of lifetime profit per customer, which would equate to 5% operating margins (and that was with an insanely optimistic operating cost estimate of ~$10 for each customers’ complete life cycle — the truth will likely prove be closer to $40).

The problem might be this — 15% of moviegoers buy 50% of all movie tickets. That’s more than triple the average. Frequent movie goers attend around 1.5 movies a month (which more than doubles if they have MP, per Mitch’s most recent statements = 3 per month).

MP has only signed 2M customers to date. That means that there are at least 34 MILLION more “frequent” moviegoers, who would presumably average 3 movies/month (75 over a 25-month life cycle — though I bet that these customers will tend to stay on board a lot longer than 25 months).

This creates a customer mix problem. If half of their customers are “average” moviegoers and the other half are “frequent”, MP’s average customer will be going to nearly 50 movies over a 25 month period (18 x 50% + 75 x 50%). Even in the Ultimate Bullish Dream Scenario, that results in exactly $0 of lifetime profit per customer…

…and I have a hard time believing that MoviePass can avoid attracting the frequent moviegoers, especially over time. The usage numbers I extrapolated from Mitch’s last interview only serve to solidify this concern.

The other problem is this — even if MoviePass does achieve per-customer profitability, we currently have to divide those total profits by the 43 million fully diluted shares that are outstanding.

When we embarked on this MoviePass odyssey, the assumption was that they were going to have something like 14 million shares outstanding. Some people don’t think that balance sheet matters, but that thinking goes against the principles of Finance 101. Balance sheet always matters… even companies like AMZN and NFLX carefully calculate their investment versus the expected return (regardless of the size of the investment or the size of the opportunity).

Thus far, HMNY has done an exceptionally poor job of financing this opportunity. Every new raise increases the share count, which decreases everyone’s share of the future profits (assuming profitability eventually comes). That’s o.k. if the rounds of funding are done at reasonable valuations, but that’s not been the case here.

At some point, they’ll reach their terminal customer limit. Customers come and customers go. Eventually, they will go as fast as they come. If that happens at 20 million customers (the bullish Wall Street scenario) and they earn a lifetime $10 per customer, that’ll equate to $100 million in annual profits ($80 million fully taxed).

We’ll have to divide that profit by the shares outstanding at that point… and at the rate they’re going, that number could easily be 80 million. If so, their EPS will be $1 many years in the future (once they’ve assembled 20 million users and put all the third-party deals in place). With a 20x P/E (a fair “mature company” multiple) that will be $20.

That sounds nice from today’s levels, but if it takes 10 years to get there, that return will only equate to 15% per year. You don’t make it big on 15% per year (I averaged over 40% per year for the dozen+ years leading to my retirement in 2008).

Of course, if they can do all that and average $20 or $30 (or more) of profit per customer, then the number start to get more interesting.

But here’s the biggest problem of all…

I HAVEN’T SEEN ANYONE GO THROUGH THIS EXERCISE.
I HAVEN’T SEEN ANYONE RUN THIS MATH.
I HAVEN’T SEEN ANYONE DEBATE THESE POINTS IN AN ORGANIZED MANNER.

Instead, I see a lot of unstructured debate with no quantification of effect.

Bulls say “it’ll work out”. Bears say “it can’t possibly work”.

That’s not how professionals invest… and the average non-professional does not outperform the market. So, if you’re not willing to do the work, you might as well buy SPY and spend your time learning how to golf.

That’s not me. I got in and out profitably by running the numbers. I’ve avoided losses by staying away for the same reason… running the numbers.

So that’s my 2-cents on how to frame the opportunity and the debate.

Unless you disagree with this framework, the only thing left to do is to debate the individual components. Everything here is pretty quantifiable, enabling us to adjust our thinking properly every time an input assumption changes.

Have fun!

_________________

Disclosures / Disclaimers: I have no position in HMNY. However, I do not encourage or recommend for anyone to follow my lead on this  or any other stock, since I may enter or exit a position at any time without notice. I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article.

The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.  I am not a financial advisor.  Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein.  Similarly, the disclosure above may state that I am long or short shares of the companies mentioned herein, but should not be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. That disclosure is true as of the time the article is placed in queue for publication, but it is possible (or even likely) that I might be buying and/or selling the stocks mentioned herein immediately thereafter or at any other time, regardless of (and possibly contrary to) the content of this article or this website’s timing of its release.  The disclosure will not be updated following submission of the article and may be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are.  I wrote this article myself and I receive no compensation for writing it.  All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

Long-time readers should note some significant changes in how I communicate in the public domain. The sole purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses. Accordingly, this document should not be construed as an endorsement of the companies or securities discussed herein. The disclosure below is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

31 thoughts on “THIS Is How To Calculate If MoviePass (HMNY) Is Worth Buying

    1. Thanks! Hope it stimulates debate in the proper direction. People are arguing intangibles instead of debating tangible scenarios.

      I definitely see potential from these levels, but the customer utilization number have to come DOWN. This is a big sticking point for me.

      Like

  1. Great write up! And yes these are the facts that should be focused on but I believe you expect too much out of SA. Just look at the most recent HMNY article…

    Here is the problem I have though with all of the recent articles on SA and this post to some extent. Hindsight is 20/20. You were just as excited as I was in the beginning we both made a lot of money and I believe you had it as a double entry on your interest list including multiple entries at higher price points. The dilution and funding have taken a lot of magic out of what made it a good undervalued deal in the first place. Thats what makes any investment good, did you find it before others at a cheap price? It definitely isn’t cheap now.

    All analysis now in my view comes down to all of this end game calculation. Why now? What changed in the 4 months where this is now a “normal” investment? It was purely speculative in October and it remains so for me now. If it also wasn’t speculative for others HMNY would be worth zero now as well. Your exuberance and interviews early on seemed to indicate this as well. Yes all of us that have been around this stock for months now are getting deflated (and rightfully so). This may very well be a horrible investment now but in my mind it is still worth the risk and isn’t going to behave like a “boring” normal stock strictly following a 20x P/E.

    We didn’t anticipate this level of horrible dilution, none of us can predict the future. Sure we knew money was needed but didn’t think HMNY had to cover all of it. It doesn’t suddenly change MP. This is the same MP we bought into when they charged the same amount and had fewer customers. Nothing had changed with MP business for the worse.

    Like

    1. Great post with great points. Just to clarify though:

      1) A few months ago, I very publicly made it clear that my “1% Portfolio” is just an “interest list”, not a list of picks. I largely refrain from making picks anymore due to the risks posed by SEC regulations (of which many Seeking Alpha writers are unaware — in fact, I just consulted with one last week who was visibly thrown aback by the facts / risks).

      2) Similarly, though I haven’t been saying so, my tone on HMNY has been far from bullish for awhile now (as evidenced by the consternation I have elicited from the bulls).

      In fact, my first article on HMNY was only an interview transcript which asked Ted about a possible $10 valuation under certain circumstances. I’ve been clear about never having “picked” the stock, thought you are 1,000% correct about my ownership history and enthusiasm surrounding their potential. However, despite those truths, my second purchases — around 20 and 12 if I recall — were said to be speculative (small) and disclosed as having been sold months ago, because…

      3. Things actually have changed (and quite significantly so), as chronicled in my posts. For example:

      * Subscriber growth has been much faster than expected, which is bullish if you trust that management knows what they’re doing, but worrisome due to…

      * Management rhetoric regarding service utilization has gone the wrong way and significantly so. 3 movies per month was supposed to be the month-1 average. Instead, it appears to be the average for the ENTIRE customer base, even though 75% of the base has been a customer for an average of about 2.5 months (remember, they changed the pricing to 9.95 six months ago — wow, time flies).

      This is a MAJOR change to the calculus that is (was?) supposed to make their business model work. Some level of usage is desirable to the company, but not this much. Not even close.

      * Dilution. We already know this one… and yes, it matters, because 100 shares bought in September bought you 4-10x as much % of the company as it does now. The profit they eventually achieve (if they get there) will now be divided by 4x as many shares as I originally anticipated( based on Mgt rhetoric.

      * Mgt rhetoric has changed rapidly and repeatedly over the past few months. Each month seems like a whole quarter (and a busy one at that). If they had a plan, they either pretended to give us the real one from the start or have pivoted for some reason.

      Among other things, the rhetoric now focuses on smaller studios, smaller movies, and smaller theaters. Anyone listening to what they have said chronologically can clearly heat that they see the “small” side of the industry as being their sweet spot… and I 100% believe that they have a GREAT opportunity within that niche… but there’s no way for them to justify their spending (and especially their rounds of funding) by being a niche player at the low end of the market, IMHO.

      Those are very big changes (and why I haven’t been complimentary of them in recent months). I’m still “interested” though… I mean, what stock enthusiast wouldn’t be!

      Thanks again for the note. I’m happy to clarify further if you wish. I’m happy to help in a communal research effort. We are all just seeking the right answer here. Cheers!

      Like

      1. Thanks so much for the quick reply! I agree with you on all points except one (see below).

        1) Totally well aware of this and it is sad that anyone looks to to blame others for their own investment choices. That is why I followed you over here as well. I think we started our journey on the MP train at almost the exact same time and loved your enthusiasm and write ups. It is sad that you have to justify/clarify all the time but well this is where we are. But alas lets move on and get to the fun stuff!

        2) Agree with this as well, I sold with a 4x gain on the first run, if I had been as smart as you I probably would have sold earlier for the 8x 🙂 But then I did buy back in with half profits at 12 and then the other half at 7. I’m not nearly as excited anymore and you can do the math above, I got caught in the dilution and am down 50%. I do get the nice broker 60% loan interest rate at least. Yes dilution matters, totally, I agree. But you and I both bought back some shares 4x as much as our original purchases the second time around. Hopefully there is still demand. Yes I know best case scenario we even make it back up to $7-8 a share anytime soon.

        A few questions that expand on your #3 if you have time to comment:

        – The investing in MP “by proxy” now is starting to wear on me and I assume you as well. Do we really judge MP now fully on things that should be expected of a real company (balance sheet, EPS, etc…) because we are investing in HMNY? It sounds like that is how all the analysis is shifting now, that HMNY=MP. This seems like such a unique situation, and how to we accurately evaluate it? Now that we hit the 4 month mark is all of the magic gone (as you note with mgmt rhetoric and dilution) where we could forgive some of these things and focus on it like a start-up/VC?

        – Do they no longer have some magical multiplier to the SP for being a future game changer? Or based on your #3 are we fully throwing in the towel now after 4 months and saying they had their chance but they didn’t prove it to us? Is there really no more end game magic left?

        – I disagree with you on the niche player and change of focus. I do agree there is no way they could succeed as a niche player (they tried for years to serve just heavy movie goers). They have to go big and Mitch realized that when he took over MP. I see it as that is where they saw they could get their foot in the door as quick as possible. They bought a movie within a few months, did any of us think that was even a play they would make? Yes it seems a little scatter shot to us right now and maybe it is but maybe it is part of their end game to get high visibility and become an integral player in ALL of the areas of the movie industry. They secretly promoted award nominated films just to prove they could and to collect data. I see it as they are trying all the things they can and doing a decent job of it, to not just be a subscription ticket service.

        And that leads me to the speculative questions that I honestly think have the most immediate impact on HMNY share price:

        – Do we really believe Mitch when he says they will be cash flow neutral in a month now (I believe he said a “few months” a month or two ago). At the magical ~4-5m subscriber number. Or do we think he is lying? I honestly think this is one of the most important questions out there. Imagine if he said “MoviePass isn’t losing money”, I don’t see how that wouldn’t have a substantial affect on the share price and the mentality of investors regardless of dilution.

        – Who was this “big pocket” backer that Mitch said (Re/code interview) would see them through to profitability? Was it just HMNY shareholders? If not and MP got more VC money from outside wouldn’t that help HMNYs SP? I believe the clause in their contract says if MP increases their stock count HMNY still gets to own the same percentage.

        – Do we think the big theater chains will outlast MP and let it die and/or out game MP and release their own subscription service?

        – Are Mitch and Ted grasping at straws now is there nothing left in the tank? They could have slowed subscriber numbers if they wanted to but they are going all in.

        – Are they crazy? Am I crazy for trusting them?

        Yes I’m getting less and less bullish just like you as time goes on purely about my return on investment in HMNY. I still think MP can succeed but do I want to be along for the ride? Am I going to get another 4 to 8 bagger or do I need to move on?

        Like

        1. Agree with most of what you said 😊

          Your comment that “hopefully there is still demand” worries me a little. Investments should be based on facts and math, not hope. I take losses when the math tells me too. A small loss is better than a big one. Not saying that it should be sold here. Just a friendly word.

          To me, MP = HMNY.

          VCs wouldn’t forgive any more than I have. I actually do VC, know VCs, and used to be a consultant to VCs 😉

          There’s no such thing as magic multipliers. That’s the work of lazy analysts trying to make something make sense to people who don’t understand equity analysis. I honestly believe that everyone should work hard to understand the framework I laid out in this article and adjust the numbers to what they believe so they can see what their personal end result is. For me, it’s still no good, but it could be very good for someone else. Either way, the math formula is the math formula.

          I think buying a small movie fits into my niche player narrative… And for the record, I believe they CAN survive (and profit nicely!) as a niche player. However, they are spending like a big gun which dilutes shareholders’ future steak in whatever it becomes.

          Cash flow positive is different than sustainably cash flow positive. They have money coming in from annual subscribers. They are getting 12 months of revenue upfront. It would be very hard not to become “cash flow positive” with that dynamic going on. The fact is, becoming cash flow positive will come with a huge deferred revenue balance, which is effectively debt for these guys. So, no, Mitch wasn’t lying, but he wasn’t providing a relevant statistic either.

          The big backer?? Yeah, I would like to know the answer to that question too… but they must’ve been on vacation over the past week 😂 😭

          I don’t know what the big theater chains will do. All I know is that they will profit for now, which is why I am long AMC.

          Accelerating their subscriber growth may be a desperate attempt at funding the business. I suspect that most new subscribers are getting annual plans, bringing in perhaps $100M+ over the past couple months… but now they have to buy every movie ticket that those people buy for the next year.

          I can’t say if you’re crazy, nor advise you on what to do… but I do highly recommend that you (everyone) figure out my framework and plug in your own numbers so you can understand what you are dealing with.

          Like

      2. Thanks again for the multiple replies. Really appreciate it. I did try to do rough calculations the first time around an $20 was my PT by EOY which I was so excited we hit way ahead of time! Yes I realize hype got us there fast but I still felt confident without dilution at that time that $20 was a reasonable PT.

        Your formulas are fantastic and I really appreciate you taking the effort for laying them out (with little to no thanks from others :))! I will definitely be using them as my base.

        There are just so many variables now, so much speculation, conflicting mgmt comments, dilution, ownership stake (which just changed today) and potentially a LOT of things we have no idea about in the inner workings of MP. I don’t disagree that all of the math right now works out to “DONT BUY” and I’m certainly not a delusional bull.

        What if there is one or two more pieces of revenue per ticket that is substantial that we don’t know about that take us to a only $2 or $3 loss per ticket? That is what bothers me is that yes maybe it is “hope” and I’m not hopeful in any of my other investments don’t get me wrong, I realize this is a HUGE gamble and I’m only risking my profits from the first time around, which were a lot (for me). I’m trapped now, yes I would like to be watching from the sidelines but I’m not cutting my losses now.

        I just give MP more slack for their future disruption capabilities and maybe I shouldn’t. I just don’t view MP as holding all of their cards and end-game close to their chest as necessarily a bad thing.

        Like

        1. What if….. yes, I agree!! But these guys haven’t held anything close to the vest. If anything, they have been overly communicative about what they think they can accomplish.

          I’m sure there are other things they will be able to do to generate revenue, but the theaters, studios, and movie investments are clearly the low hanging fruit and therefore probably represent the bulk of the realistic opportunity. I could certainly be wrong about that though. It’s just my opinion.

          As far as being “trapped“, I just finished telling somebody that small loss is bigger than a big one. When somebody feels trapped, it’s usually a sign that they are going to lose a lot more money. That’s been my experience (often a personal experience!).

          I’m starting to feel like too many people are holding onto this stock on hope as opposed to research (which is bearish). That’s typical “wait time” psychology. Just my two cents though.

          Like

  2. I do think there may be potential to further monetize a large sub base beyond the ways you have, BUT and this is a big BUT for me, I think Ted is too incompetent to do it. Ted has yet to put together a compelling investor presentation and actually market the stock as evidenced by the really bad finance deals. That is incompetence or maybe just laziness. I agree balance sheet matters, so how does a guy like Ted not get that?

    Like

    1. Great post. I don’t have an answer to that last question.

      Consider this though — Ted is a marketing genius IMHO and Mitch is a GREAT operations guy. However, neither have a strong financial background and I suspect that Mitch has been given too much praise for his business building. He sold his NFLX stock early on, showing that he didn’t see the vision. And he didn’t start Redbox. He walked into the situation and merely did an AWESOME job of getting it into hundreds of locations (which the company already had, due to the placement of 100s of successful Coinstar machines).

      That leaves the current CFO(s), none of which have experience with these situation and none of which seem to be pulling the trigger on these financings (as confirmed via my conversations with Ted).

      I’m not saying it’s a dead story, but I’d like to see the bulls (and bears) use my framework to show how/why the math is attractive / unattractive in the longer term (because it certainly isn’t now, but that may be defensible — I just haven’t seen anyone defend it in the form of a quant model yet). All I hear is a bunch of “numbers don’t matter… it’ll just work”.

      Yeah, well if that was how professionals analyze investments, HMNY would have attracted better financing deals from the west coast unicorn experts. Somehow, those Disruptor investors don’t know that MoviePass exists?

      Not acknowledging these things is a clear case of confirmation bias. Unfortunately, there’s almost no cure for that.

      Like

        1. I was going to say that having no debt is a positive for their viability. However, their deferred revenue balance might exceed $100 million at present.

          Considering the nature of their operations, this is effectively debt, since they have to buy every movie ticket that each of those customers buy over the course of their subscription (which is nearly a full year in many cases).

          Like

    1. 45m in 2 months for maybe 15% ownership. So they are valuing MP at 300 million? I may be wrong on the 15% but I think that is about right.

      Like

      1. Agree Mark, but that was the old valuation when they bought the 51%. Looks like 280m to 300m now for the 62 to 78 if the press release really means they paid 45m over 2 months for it. That could have been in 2 steps possibly, so maybe they are valuing a more recent injection a little higher possibly. Not quite sure what to make of the 38 million shares. Unless they paid off something that was convertible that I did not know about, it should be around 42 million.

        Like

        1. That’s silly to me. They secured a highly restrictive form of anti-dilute from MP, putting them in the driver’s seat to dictate valuation. I’m not saying to be total sharks about it, but why give them a $300M with cash you secured by selling shares of your own stock at a lower implied valuation. They’re basically paying $7 for five-dollar bills!

          Like

      2. Well think about this. HMNY has a market cap now of about 182m with 110m in cash and 78% of MoviePass. Even if MoviePass is worth 220m these numbers do not make sense.

        Like

        1. They do if MP is carrying $100M+ of deferred liabilities, as I suspect. That’s effectively debt. If you agree, suddenly the numbers fall right into line.

          I’ve made a lot of money by properly valuing deferred revenue. For software companies, deferred revenue is often an overstated liability, which causes investors to undervalue the underlying company. In this case, it is most likely an understated liability because of the number of movie tickets they will have to purchase against that deferred revenue balance.

          Like

      3. There you see. That’s why I like you. You help me see something I missed! Then that takes me back to your prior comment. Why the heck did they pay for more MP at a 300m valuation???

        Like

  3. Hi Mark,

    There is only one problem with your calculations… and it’s that you can only “do the math” with whatever is currently (or almost) on the table, eg they use the present’s input values. I am going to come up with an SA article myself, where I will explain why the whole “math” should be forgotten with a market-changing / disruptive / almost endless possibility bringing business idea as MP! I invite you to join and read. Believe me, it will be more than just an “It’ll work out” BULLshit!

    But making calculations by using numbers you don’t know (and cannot even guess) is simply worthless! Still, your post and the calculations rather put the needle to the bullish scenario side, especially taking into account how much did you miss out of the equation.

    Anyways, I think what you’re saying here is objective enough, simply just not much less short-sighted / “limited” than most bear opinions regarding the future scenarios. It’s like counting with DVD prices back in the early Netflix era or thinking how the $100/y Amazon Prime worth it with avg 2-day shipping cost around $30/pkg! 😀 But I don’t want to spoil my future content, just don’t expect this much of numbers! As Mitch said in an interview, “it all comes down to wether you believe in it or not”. Couldn’t be mure true!

    Thanks for the post, stay tuned, I’m really curious about your feedback thereafter!

    Cheers,
    Szabolcs

    Like

    1. Hey, I get what you’re saying. Incalculable aspects of the story her not lost on me. Intangibles do matter!

      However, to your point, any discussion of “endless possibilities” needs to be reigned in and detailed, so we can envision the opportunity.

      As a lifelong growth stock investor, I’ve done this with countless companies. “if they can do this, then they will be able to do this later” is a major bear buster (and why so many people were wrong about AMZN, FB, and others).

      That may also be the case here… and I would LOVE to see it that way, Because even in my framework, there are many highly bullish scenarios. To be clear, if I was outright bearish, I would be short the stock.

      Rather, I’m worried / skeptical about their actions and plan execution and seeking a reason to become excited again. I live near Ted’s place in Miami, really like the guy, and hope he kills it… But I have to remain objective.

      In other words, I’m looking forward to your article and hope it provides me with a mind-changing viewpoint that I am currently missing. Indeed, this sort of collaboration / feedback is why I do this. There’s more power in two brains than one (most of the time LOL).

      Cheers!

      Liked by 2 people

  4. p.s. I saw the brilliance of “DVD prices back in the early Netflix era or thinking how the $100/y Amazon Prime worth it with avg 2-day shipping cost around $30/pkg!”. Those things made sense relative to the investment in developing the business. In this case, I believe the investment is not commensurate with the opportunity (but again, I’m open to having my mind opened/changed on that — it always requires and open mind and imagination/vision into “what might be”).

    Liked by 1 person

  5. Sure, I appreciate your answers Mark! I’m just saying, that time no one could count with these. I understand that those days were different! Since we didn’t have these great examples.

    But today, we have examples! We see how much you can do if you are in a ‘great relationship’ with your customers, as Mitch just said on the CNBC interview. And if you have a lot of them. All what matters now is the direction and growing this precious user base. I will hint many great examples for both sides of the equation. Things worth to count with, things I would have never saw If I was young and had to think in the pre-Google / Amazon / Netflix etc era. These are goliats now, their possibilities are still endless and they are still coming up with great ideas and turn them into great (and sometimes not so great) services and products from time to time.

    Like

    1. Actually, things aren’t any different than they were back then. I was a technology analyst before most people knew what the Internet was. At every point in history, innovative companies are formed that can do much more than it first appears.

      Amazon wasn’t an Internet book store, it was an e-commerce business that simply started with books. Uber isn’t a ride-sharing company — it’s a logistics company that’s building its future infrastructure, partially via ride sharing. For each company, you have to imagine what they MIGHT do with what they’re building, instead of making the mistake of thinking that it will be what it is today.

      I’ve been doing that with MP and have some good ideas, but struggle to get past a certain point before seeing them bump into diminishing returns or much bigger competitors. That doesn’t mean I’ve thought of everything. If there’s one thing I’ve learned, it’s that Mgt can come up with more ideas than investors can — they’re paid for it and it’s all they do 24/7.

      So, trust me, I know the drill. I made my fortune doing it… and I’m widely credited for being the person to brought this story to broad light (which required seeing the vision in offering unlimited cinema tickets for $10 a month), so I understand the story.

      I simply don’t see enough to love and repeat —- I’m open to hearing other people’s ideas, because I’d LOVE to be back on board, especially with all the negative sentiment surrounding this financing.

      Looking forward to reading your ideas.

      Liked by 1 person

  6. Mark – Your key assumption is flawed: “Based on MP’s publicly-stated attrition rate (4%/month), the average customer will be a customer for 25 months (~2 years).” How can you justify this? Most subs don’t drop out of a sub service where they like the value proposition offered. Even when other sub services raised prices, they only lost folks at the margins and overall net subs kept growing. Are you saying that 2 million subs (as of today) will be gone in 2 years based on a 4% attrition rate. That’s flawed. Attrition doesn’t mean permanent cycling of death of subs.

    Like

      1. But you can change the math based on your assumptions. That’s the beauty of a framework 😊 FYI, the number they gave was just 2% a few months ago… and then 4% more recently.

        Like many of their metrics, this one has degraded. As a numbers-driven risk/reward investor, I had no choice but to update my model to reflect this updated fact that they supplied.

        Not surprisingly, it had a significant impact on my calculated valuation. One more reason I got out when I did.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s