AMC: “Avoid MoviePass, Canaccord”?

Man, that Canaccord report on Helios / MoviePass (HMNY) was one of the worst I’ve ever read (and I’ve read thousands in my career). Believe it or not, I love Canaccord. I have a long history and affinity for Richard Davis. Rich might be my favorite software stock analyst ever. His level of research diligence is impeccable and his track record shows it.

We generally come to the same conclusions. WDAY is the most recent example, but QADA stands out in my mind because it tripled from 11 to 33 under my coverage and has continued on to 46 under his.

But you have to judge a company on an analyst-by-analyst basis… and while Rich is top notch, the author of last week’s Helios (HMNY) initiation report showed that Canaccord has its share of analysts that need more experience.

I won’t call him out by name or belabor the point, but anyone who has done their research knows who he is and has seen his LinkedIn profile. He’s young and very inexperienced. In fact, his own company hasn’t seen fit to make him anything more than an associate analyst.

I can see why.

I won’t go into too much detail because I have a long reputation of not commenting on other analyst’s work, but I’m making a special exception in this case, because he gave HMNY a $15 price target based on metrics and assumptions that boggled my mind.

I’ll only mention a couple (for the benefit of those who have seen the report) and leave it at that:

  1. There’s no way that the monthly ARPU is coming in at $10.50 this quarter. Do the math. Even the bulls have to agree with this.
  2. I see ZERO mention or accounting for Costco’s compensation… and I think it closer to 20% than zero. If I’m right that’s an enormous math error. I mean, what’s the price target if you subtract 20% from a major proportion of this (and last) quarter’s signings?
  3. He has them earning close to $13 in 2022, assumes a 12% WACC, and yet gives them a $15 price target. Anyone who knows anything about DCF analyses should start laughing… right… about… now.

    Wow.

  4. Honorable Mentions: He also sees the utilization rate dropping from 2.6 movies per customer last quarter to 2.0 this quarter, thinks they’re going to get a 20% cut on 7.5% of the movie tickets they buy this quarter, and doesn’t think they will need to raise any money between now and 2022. I won’t call this “crazy”, but I can certainly think it is.

 

Regarding the 2.0 utilization rate for this quarter, IDK whose cohort assumptions he’s using, but things don’t seem to be playing out that way so far. If I’m right about this, the problem likely stems from this statistic (quoted directly from Mitch himself):

“89 percent of American moviegoers only go to four or five movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one a month. They balance out the 11% of the population that go 18 times before joining MoviePass and then after go three times a month. It works out. Over time, it actually works out to be about one movie per month per subscriber.”

Do the math on that and you’ll agree with Mitch. However, that assumes that only 11% of MoviePass customers are going to be frequent movie goers (in exact proportion to their representation among the movie going populous.

Sorry, but even the bulls have to admit that’s not realistic. This product appeals to frequent movie goers first and foremost. They’re the first ones buying it and they’re more likely to renew than the average someone who goes to 6 movies in the first three months of his/her 12-month subscription period and then goes to 2 in the final four months. That someone is much more likely to non-renew.

So, over time, we could see 50% of MoviePass customers being frequent and 50% being infrequent. That’s not hard to believe because 35 MILLION people fit into the frequent category. ALL of them SHOULD sign up. What percent of them will?

Take your own guess, but while you do, understand that Canaccord only sees MoviePass attracting a total of 12 million customers by the end of 2022. If just 17.2% of the USA’s 35 million frequent movie goers sign up for MoviePass (again, ALL of them SHOULD, because it’s a LOT cheaper than what they’re spending now) then my 50% / 50% scenario plays out…

…and based on Mitch’s quote, that will create a blended average utilization rate of 2.0, which will result in a $300 million loss in 2022, instead of the preposterous $700 million profit that Canaccord has them earning (which, BTW, is based on MoviePass getting a 20% cut on almost HALF of EVERY movie ticket sold in America.

Does anyone out there believe that can actually happen? If so, I’d love to hear from you. The comments section is open to any modestly intelligent feedback or opinions. So far, things have gone well in that regard. We’ve had some good conversations, analysis, and debate.

Indeed, I WANT debate. Someone, PLEASE show me the analysis to convince me that I should be bullish.

wow… just wow.

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, exit, or reverse 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.

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33 thoughts on “AMC: “Avoid MoviePass, Canaccord”?

  1. I’m not familiar with what access these analysts get when their firm is running the offering. For example your #2, shouldn’t he have this info, or would it still be private?? Not account for it is insane when it is easy to assume a significant portion signed up at a lower rate.

    Not needing to raise money immediately deserves a crazy designation, why else did HMNY shareholders vote to increase shares available?

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  2. I don’t know if this is modestly intelligent or not, but a question: Is the 12 million by 2022 driven by increase in subscription pricing? That seems like a low number unless they are assuming significant price hikes. I did not understand the AMC part in the title either, but now I get it! Thanks for explaining.

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    1. They have pricing rising a few bucks over that timeframe. I’m hypothesizing pretty even elasticity. I don’t know what the perfect price would be, but don’t see pricing as a major factor. It is likely a moderate one though. We shall see…

      Damned title was too “cute” 😂😓

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        1. Unsure, but when I picture it being more or less, I see the frequent customers being what makes the difference, so I don’t think more would necessarily be better. Could be much worse. Besides that, thing WILL slow down (even if sales efforts are ramping, the hype is dying based on empirical evidence). People will non-renew. Etc.

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      1. Yea, I don’t know if I quite go along with “the hype is dying”. If you look at when the pace of growth slowed it matches up almost exactly to the day when they switched to $115 all up front annual plan. As far as I can tell based on looking at their website, the 9.95 monthly plan was suspended for new enrollments at the same time. I believe MP was adding subs at around 22k per day just before that and about 15k per day since. The other event that coincides with the slowdown was the termination of some customers. I would be willing to concede that may have hurt the hype a little bit, but I bet the annual plan being the only option is the biggest factor.

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        1. Good points, but even the Google traffic statistics are falling.

          Either way, the key point is still the frequent vs. infrequent. Bulls and bears will win or lose on that point more than any other.

          The problem I see out there is that too many people are hanging their hat on a couple of data points instead of putting proper weight on the ones that matter most.

          In my mind the frequent user issue is around 45% of the weight in my mind. The theater + studio revenue share issue combine for another 45%, with everything else only having 10% weight, due to the impact of the first two issues on profitability and dilution.

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      2. Oh and lest I forget that was also about the time of the AMC block of the 9 theaters (everybody says 10, but I have yet to see a list of 10), which surely has some impact on growth of new users in those areas.

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      3. Yea, I know you keep saying that (about frequent users), but I keep thinking they will simply cap the number of visits per month or raise price or both to solve that issue, so I am not sure why you think that problem can not be solved when the time is right?

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        1. BOOM! Thank you for a GREAT point. YES…. IF they can get away with that without losing a big chunk of their base, it’ll make a big difference.

          Actually, even if they do lose a big chunk of their base, it would likely be the chunk that they don’t want, so this point needs to be given a good deal of consideration. 👍🏼👍🏼👍🏼

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      4. Of course, have to consider the impact of theater subscription models against it. I think most will eventually have one or be fully participating with MP. Maybe some will find a way to do both. I think CNK showed us what that would look like. 1 ticket for a little less than the price of a ticket per month. The carryover option is important. Without that, I think it is almost worthless. With the way they pay the studios, I don’t see how they could do anything “unlimited” or even with multiple tickets per month without charging a whole lot more than 9.95.

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    2. If you ask me, the switch to an annual only plan is one of those ways they can tweak the churn rate down and it would not surprise me at all to learn they get less usage over the course of a year from the annual subscribers. It also feels like a good price point for gift giving ($115) for many people. I would love to see some data on monthly vs annual vs annual gift recipient subs to confirm all this, but on the surface it seems like a logical way to improve if not solve the higher usage issue.

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    1. The key word is “hype”. “Momentum” is still strong thanks to the sales/marketing agreements they are putting in place, but the organic excitement is definitely died down. Pick your sources and you’ll see.

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      1. Wellllll, I would have to say that’s i consider hype subjective and it may be hard to prove with empirical data 😝

        Although the management of capital raises has seriously tanked whatever mojo we had and is a serious, maybe deadly?, injury.

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  3. This is what I’m talking about, folks. Too many investors talk first and think never. Anyone who has done their homework knows that I’ve taken many more sources of revenue into consideration than guys like this can even imagine. If you want to compete with professional investors for success, don’t act like an amateur 😂😂😂

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  4. As I wrote about in my original thesis for MoviePass… I believe this is all a bit of a waste of time. Ultimately we are investing in Brand, Management, Industry, and Moat. The phase we are in has ZERO to do with the business model and everything to do with building a MOAT. Subscription businesses are very powerful and profitable. I know because I own one. The name of the game right now is grabbing real estate (subscribers).

    Anyone who has seen the Cannacord report knows that this business ultimately comes down to two things.

    1. Increasing mix of casual users as the brand becomes more mainstream (resulting in fewer # of movies seen in month one)
    2. Decreasing # of movies seen over time as a user ages away from their sign up date.

    Now I’ve seen a bunch of terrible assumptions being thrown around here and just one that comes to mind is usage of a 4% churn rate to figure out lifetime value of a customer. Not only does that churn rate drop after month one as posted publicly in a prior press release by the company but to extrapolate that churn rate out from these early days when the app is still full of bugs and customer service is horrible, is nothing short of absurd.

    But I digress.

    I’ve done the research to know that both 1 and 2 above are true. Independent surveys verifies this. The question is to what extent does it drop? The Cannacord model requires about 1.4 movies a month to break even. How quickly the company drops from 2.6 to 2 and ultimately 1.4 and lower will determine how much money the company needs to raise and when. But this doesn’t impact the ultimate success of the company. I’ve always expected the company to raise a total of $1B and my calculus on this has not changed. So why am I long?

    Well refer to my original article, won’t link it here. But I will summarize.

    It’s a fool’s errand to calculate the exact #s here because all that matters is we conceptually agree with the thesis that moviepass customers will see less movies as time passes and as their brand grows, they will get more casual users and more rural and suburban users (who are cheaper). Why is this all that matters?

    Because the company can easily adjust pricing and policy to make it work. And we know they aren’t afraid to do that. They can cut out the benefit of seeing the same movie multiple times, they can raise prices slightly, they can offer family and other plans. Personally I’ve been advocating for a 1 movie a month couples plan at $9.95 or even an individual one movie a month plan at $4.95 a month and will continue to do so. Based on survey’s I’ve done, I believe this price point will attract the SELDOM user base, expand the size of the industry, and in the end be the most profitable segment for MoviePass.

    But let me get to my ultimate point. I have polled dozens of super users. The users who watch 10-30 movies a month. These represent a small percentage of customers but has a huge impact on the average. I asked them if they would stay with MoviePass at $9.95 if there was a limit of 3 movies a month? All said yes. 2 movies a month? All said yes. 1 movie a month? Nearly all said yes.

    If a 1 movie a month plan is good enough for the super-users wouldn’t it be for the casual users? What do we learn from this. We learn that the “Unlimited Plan” is merely a marketing gimmick. An important one. It gives the perception of value and allows for the media coverage which leads to viral growth. But at the end of the day, it is not an important value proposition for consumers. Once MoviePass has critical mass, it is a very trivial matter to significantly change the math in their favor by making policy changes such as max 30 movies a year or the such… or charging a small per unit fee per movie after X movies seen per year. It’s all in the marketing.

    Bottom line. There are reasons to be a bear, but anyone who cites the math of the current business model as the reason to be a bear is just misdirecting you or simply isn’t looking at the right thing. It can be instrumental in timing dilutions and trading the stock but if you are a bull you are a bull because I believe in the brand, the industry (problem being solved), management, and the moat.

    You want to be a bear? There is some room for doubt. Namely – I have some doubts about management and their ability to execute on this plan. There is nothing more I’d like to see than high level executives coming from Facebook or other modern tech companies. There is alot more to this story but I won’t show all my cards here.

    At the end of the day, this is a VC type of investment which will go up 20x or more or will go to $0. I am fine with that risk reward and I’ve modeled in up to $1B in equity raises so they have plenty of time to make the right moves and make this work? Does that make the stock a slam dunk? No. It may go to $1 before it goes to $100… or it may go to $0. But don’t talk to me about math and extrapolating data out of context… I mean comeon. That piece extrapolating data from Marcus was so irresponsible and irrelevant in the way it was presented and the significance of it. Again same with that churn number to figure out lifetime value. If you are going to throw those numbers out there, you have to give proper context and talk about both the bull and bear assumptions. Bottom line you are a bear and you take every # and make a bear assumption. Nothing factual in that. It’s just your opinion… as is mine.

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    1. Folks, for the record, I have control over which comments get approved to be published here and I approve this one (even though Ben is a staunch opponent of my thesis).

      Why? Not because I’m a nice guy, but because he does great homework. I have supplied information on why you cannot just acquire customers at any cost and supplied data that shows that movie pass is acquiring customers at too great a cost, but Ben has some great points as well (the churn point is a good example, especially with annual subscriptions now dominant). I’m thankful for his diligence, because if anyone convinces me to turn bullish, it’s as likely to be him as anyone else.

      But for now, the issue remains that 1.4 movies per month MIGHT support profitability, but will be hard to achieve when the average frequent user goes to 3 per month and dominates the customer base EVEN IN THE LONG TERM, relative to its proportion of the aggregate.

      There are 35 million of these people for MP to sign and I bet that 15 million of them sign up before 15 million non-frequent members do… and of course, they will renew with greater frequency (helping the churn number, but only to MP’s detriment).

      I welcome continued debate. Thanks for chiming in Ben!

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