I’ve spoken to many people about MoviePass over the past week… and none of them have put up much of a debate. That’s disappointing to me because I’d love to become bullish on HMNY again.
Of course, a good analyst doesn’t declare victory just because they out-debate everyone on the topic. A good analyst will constantly debate themselves. This helps to combat confirmation bias.
In other words, I don’t care about winning debates or “being right”… I care about determining the truth.
In pursuit of the truth, I re-checked all of my arguments… and after finding so many flaws in other people’s thinking, I actually found one in my thinking.
It’s not enough to make me bullish, but it does make me less a little less bearish and a little more hopeful. The flaw stems from this comment from Mitch in the Recode interview from Feb 18:
“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.”
When I first heard the interview, I didn’t catch the nuance of “one in 19” being placed in the context of “$50 million box office films”. If he was indeed referring only to those smaller films (and I believe he was), then it would be incorrect for me to make broader ticket-buying assumptions on that basis.
Further, while we can use HMNY’s capital raises to help triangulate data/analyses, we can’t solely use them as evidence of how much $$$ they’re burning. So, utilization probably isn’t as bad as I thought, but everyone from Canaccord to Ted have confirmed that it’s still higher than the original assumptions that made me bullish on HMNY.
Further, according to Mitch, still remains that “11 percent of the population that go 18 times before joining MoviePass and then after go three times a month.” That applies to 35 million people in the U.S. — and so far, MoviePass has only attracted 2 million customers in total. So, there are a lot of three-movie-a-month folks out there who still haven’t signed up.
If they sign up faster than the general population, the blended average utilization simply won’t come down to the levels they expect and need for the business model to work. This is especially true as they sign customers up through partners (like Costco) who take their cut, leaving MoviePass with somewhere around $6.50 per month per Costco-driven subscriber (my estimate — please feel free to research it yourself and LMK!).
That’s 35% less than I expected, while utilization is costing them something like 20% more than I expected. Canaccord sees third-party revenue approaching 30% of revenue in 2022. Based on these figures remaining stagnant, that will result in operating margins in the vicinity of negative 40%!!!
Of course, I fully expect the utilization numbers to come down and the revenue per subscriber (also known as ARPU, FYI) to creep up over time. However, 2022 is four years away and the current level of third-party revenues is somewhere close around 1% of revenue.
This is why even their ultra-bullish investment banker, Canaccord, has them losing $350M over the next two years. The only thing keeping the cash flow in (or near) the green is taking in 12-months of revenue from subscribers upfront. If they can’t keep accelerating the sign-up rate, that won’t hold up, because they have to service that upfront revenue with month-after-month of movie ticket expenditures.
So, it’s a race… and unless you’ve been analyzing the numbers carefully, you don’t know if they are moving forward or back. According to my figures, it’s still the latter.
I REALLY hope that changes. I WANT to buy this stock, but the numbers are telling me to stay away. I’m sure nimble traders can take advantage of the wild fluctuations, but the general trend has been down… and justifiably so, IMHO. Again, I HOPE to update you all at some point with a different view.
In the meantime, I can’t wait to see the Q4 results. Whether or not they decide to do a conference call will speak volumes for whether things are going well or not. Transparency is the ultimate show of confidence.
Either way, I already have my estimates ready and will be crunching the numbers as soon as they are released. Of course, I’m not going to share my secrets until I’ve figured out what it all means and make my move, but I will share my research once I’ve put my chips on the table (as I always do).
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