Maxim Updates HMNY Price Target

Maxim lowered its price target on HMNY by 36%. Their target is now a still-lofty $16 per share. This is in-line with Canaccord’s target, but the Maxim report demonstrated a much better grasp of the fundamentals.

New info in the report included Maxim’s belief that:

1. …most of the top seven studios have partnered with MoviePass (or “MP” for short).

   This is primarily for advertising, with payment currently/predominantly coming on a per-ticket-sold (rev-share) basis, which shouldn’t be construed as big news. It’s unclear how “per-ticket-sold” is being calculated. If I’m a big studio, I only want to compensate MoviePass for the extra tickers they help me sell, not every ticket bought via a MoviePass. There’s a big difference between the two.

   BTW, if we’re just talking about pure eyeball advertising, all of the major studios (indeed, every studio of every size) should be partnered with MoviePass. It’s undeniably a relevant medium for reaching movie-goers. The revenue ramp from this is worth tracking, since its one of the keys to their hopes for achieving future profitability.

2. …MoviePass now buys between 5%-10% all box office tickets sales in the U.S.

   What??? OUCH!! I’ve been trying to triangulate this number and have been coming up with bearish results… but 5-10% is even worse than my bearish figures. Unfortunately for MoviePass, this overlaps with the high-end of my estimates and coincides with AMC’s utilization statement this morning. It also implies that Mitch’s “1 in 19 tickets” comment wasn’t specific to just sub-$50 million movies, but all movies (since 1 in 19 = 5.3%).

   Does Maxim realize what this figure says about the second derivative of MoviePass utilization (not to mention, cash burn)? See my other posts for more on this. I’m not going to rant about it again (at least not here), but it’s 100% critical for anyone involved to understand.

3. …MoviePass will soon block more AMC theaters.

   I won’t be surprised. Nor will I be surprised if they do it this week, to steal AMC’s earnings thunder. The question is, “will it matter?” If the major theaters all refuse to play ball, MP will be relegated to a niche player (which is what I think they should be… and that’s not necessarily a bad thing!). Alternatively, if one major theater plays ball in exchange for an exclusive, MP can never achieve Canaccord’s expectations, due to the amount of market share that will continue to be held by the remaining (non-conforming) majors.

   Net-net, I don’t think this matters as much as the utilization-rate issue. Even if MP gets a cut from 100% of tickets, they still need utilization to be low enough to keep subscriber gross margins from killing their hopes for profitability. To be clear, I won’t be surprised if they achieve profitability someday, but I think it will take longer than people think and not be enough to produce meaningful-enough EPS (especially with the “S” in EPS continuing to go through the roof).

4. …Costco sells more than $200 million in movie tickets and receives significant discounts per ticket.I have no idea with the notion that MP will get revenue sharing agreements. My problem is my ongoing contention that it won’t come close to offsetting the negative gross margins from subscription revenue minus utilization expense. Further, Costco wouldn’t be cannibalizing its own ticket-selling business by co-marketing MP. I’m sure they’ve run the numbers and like what they’re getting out of all this (especially if MP can only sign second- and third-tier theaters (because Costco makes its hay by selling major theaters’ tickets).
5. …HMNY will have more than 105 million diluted shares outstanding by year-end.

 

Notably different than Canaccord was the following:

1. Maxim’s valuation is based on what it should be based on — a 10-year DCF. Further, they use a discount rate of 24%, which is much more reasonable than (and double) Canaccord’s 12% WACC figure.
2. Maxim believes (as I do) that MP is getting revenue shares from theaters representing 2.5% of the country’s screens. I suspect those screens are among the most needy, so this may represent 2% of ticket sales (versus Canaccord’s 7.5% projection for Q1).
3. MP has identified about 100 AMC theaters (which probably equates to 1,200 screens) that are located near at least two other theaters. Presumably, these will be the next to be cut off. However, 1,200 is not a deadly number when you consider that 1) MP has only signed 1% of Moviegoers and 2) AMC has around 8,000 total screens. Nonetheless, how this saga plays out is a critical watch factor for analysis and calculation.
4. Maxim assumes no significant concession sharing revenue in its model.
5. Maxim sees over $300 million in net losses for 2018/2019, a bit lower than Canccord’s call, which is closer to $350 million. This is the only number where I favor Canaccord over Maxim.

 

Conclusions: Maxim’s analyst demonstrates enviable knowledge of the company, in stark contrast to the Canaccord analyst. I can respect Maxim’s view.

Nonetheless, I still don’t see anyone addressing the issue of utilization and frequent vs. non-frequent moviegoers, which should be painfully evident to anyone who has done a cohort analysis and estimated a utilization-over-time curve.

Heck, Maxim’s own contention that MP is buying 5-10% of all U.S. movie tickets suggests that utilization across MP’s entire base is currently over 3 movies per month. 3 was supposed to only be the first-month utilization… and half of MP’s base has been a customer for 2-6 months!!

This suggests that the average customer is either one of the 35 million frequent moviegoers in the U.S. or that MP is getting people to attend even more movies than anyone expected. Personally, I think it’s the former. The latter doesn’t make sense based on all the data we’ve seen.

Again, see my other articles for more on the frequent moviegoer utilization issue. It’s the biggest key to my sentiment on MP and HMNY… and why I continue to avoid stock.

Cheers

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