Oh man. Just when you thought this story couldn’t get any crazier. In the wake of this bombshell, I will help HMNY shareholders understand what their stock might actually be worth.
Let’s start with something I said in my last post. It’s actually something that HMNY shareholders already know (all too well):
Institutions (many of which are non-shareholders to begin with), have been benefiting from HMNY’s financing deal terms. By simply being a Canaccord customer, they’ve been getting HMNY for 30%+ below market price (and getting free warrants as a bonus).
Meanwhile, loyal shareholders are getting diluted by those very same deal terms.
Welcome to Bizarro World. HMNY’s loyal shareholders are the only ones holding the stock price up. Yet, they are the only ones getting crushed.
Management has attractive compensation package. Theaters and studios are getting more business at no cost. Investment bankers are getting a nice cut of each funding round. Funding round participants are getting a big discount and warrants.
Does this seem fair?
As if things weren’t bad enough, last night TechCrunch reported that CEO Mitch Lowe has officially admitted to “misleading both consumers and advertising execs with statements last week that the company tracks the location of users before and after they go to the movies.”
“We don’t do the things I described,” he told TechCrunch. As for location, “We don’t record it, we don’t save it, we don’t follow it.”
Of course, this comes as no surprise to me. I’ve been saying this for a long time (and even repeated myself just two days ago).
“The amount of data that MoviePass has about you as a customer is relatively small. I’m a MoviePass customer and they don’t have much data on me. They don’t track me around because my location is not always on for them, nor is the app open very often. So that’s an overstated opportunity IMHO.” – Mark Gomes (March 11, 2017)
Incidentally, I’ve also been saying that Helios is not a Big Data company of any consequence. I covered Big Data companies before officially winding down my Pipeline Data operations. I can honestly say that none of my industry research contacts ever gave them any credit for offering anything of substance.
These revelations call into question the timing and credibility of MoviePass’ long-term plan and strategy.
Mr. Lowe said it himself:
“Sometimes I get all excited about our future vision of a night at the movies and building an ecosystem around it,” he said. “I need to correct what I said. The way I portrayed what we do is not accurate. I implied we know where you are when you’re on the way to the movies, and that’s not what we do.” – Mitch Lowe
For the record, I’m not here to do a victory dance. This isn’t about being right. It’s about properly analyzing the information at our disposal. Anyone with enough Wall Street experience and an unbiased mind can do that. The only thing I’m doing is quantifying their public statements against public industry data points.
As data experts, they must know what their statements look like when run through a simple spreadsheet, no?
Personally, I’m becoming more and more disappointed by the day, because I want MoviePass to succeed, but I’m not going to fool myself into thinking it’s going to happen just because the story and vision sound good. I’ve heard (and often invested in) enough great stories in my career to know that most of them prove to be nothing more than pipe dreams.
This is well known in the investment industry. It is often stated that even successful VCs build portfolios of 10% winners and 90% losers.
The key is having the professional experience to identify enough winners (and losers) to maintain a healthy slugging percentage (because hits have varying degrees of value).
For the record, I offered to help the company with their messaging and strategy many times (it was a part of my job for many years before launching Pipeline Data).
Interest was expressed, but they never followed up.
Moving on… I’ve also previously explained that loyal shareholders are being penalized because institutions aren’t supporting HMNY’s valuation. This is largely because they smell more rounds coming (never mind their doubt in the business model and executive management, due to their wildly-variable public discourse).
In the meantime, MoviePass continues to require more funding. This is not just my opinion anymore. If management’s statements are to be believed (which we now know is questionable), the rounds of financing are going to become increasingly critical and onerous:
“…it is losing money at a phenomenal rate and only survives by frequent cash infusions.” – TechCrunch
“Today what you do is you raise enough money month by month to fund essentially that negative cash flow” – Mitch Lowe
I understand the strategy. They’re trying to build their customer base to a level where they can exert power over industry participants (especially theaters). The key question are, “How many customers is enough?” and “How much funding will that require?”
The answer to the first question remains to be determined. However, based on management’s recent public statements and year-end goals, it’s pretty safe to say that 5 million subscribers is the minimum needed.
This makes sense. I’ve previously analyzed how much $$$ MoviePass believes it is bringing to the theater operators. That analysis concluded that a moviegoer becomes nearly 3x more profitable when they subscribe to MoviePass (again, assuming that MoviePass is correct in their assumptions, which has been a hit-or-miss affair to this point).
This is good news and bad news.
It’s good news, because it gives MoviePass the right to ask for a cut of the benefits they bring to bear. However, it’s bad news because the theater operators are currently getting this benefit for free. It’s also bad news because the benefit is so big, MoviePass has to stop supporting about 65% of an operator’s theaters to create a negative impact (relative to the original status quo).
Thus far, they’ve only stopped supporting 10 of AMC’s theaters nationwide. That’s about one percent (1%) of AMC’s theaters. If they shut off 65% of AMC theaters, I suspect that the backlash from MoviePass customers would be far more devastating than the impact on AMC.
That’s especially true at present, since MoviePass only has 1% of all moviegoers as customers. ONE PERCENT. That’s not enough to scare any theater chain, major or otherwise. That’s why MoviePass is rushing to obtain 5 million+ subscribers.
The minor theater chains are cooperating, but only because they need all the help they can get to gain market share against the majors. If they don’t, they will lose the ongoing industry battle of attrition. That makes MoviePass the ally of minor theaters and the enemyof major ones. This is why the majors aren’t playing ball.
To force the issue, MoviePass needs a lot more subscribers. To do that without a cut from the majors, they will need to raise a lot more money.
This was confirmed by Mr. Lowe’s statement last night that they hope to get to cash flow break-even early next year. Of course, that’s a big change in his January guidance which called for them to be cash flow positive this month. Of course, we now know (though I’ve been saying it for a while) that the numbers don’t match what management has been saying.
This is all clearly outlined in my models (which, again, have been built on assumptions provided publicly by Mr. Lowe — see my last post).
By the way, I’m not saying that MoviePass won’t be successful… but I am saying that there won’t be much value in the stock, even if they are. Regarding that success, if they can keep convincing investors to give them funding, they might be able to build the critical mass needed to force theaters to give them a cut.
I’ll explore where that can lead them, momentarily. Before I do, allow me to reiterate…
The major theater operators see MoviePass as a threat and an enemy, not a ally or a boon. They donot want to give MoviePass a cut.
Here’s another reason why…
It’s 100% true that MoviePass can deliver increased profits to the theaters. However, giving MoviePass a cut will aid their quest to become a strategic industry powerhouse.
Anyone with an MBA (or enough business experience) knows that you don’t trade a critical strategic advantage for money (unless it’s a lot of money… as in a buyout).
So, while the money is great, the major theater operators would surely prefer to see MoviePass either 1) tread water, below critical-mass levels or 2) go out of business.
The majors are already increasing profits and market share via theater renovations, electronic ticketing, liquor sales, etc. This is causing the gradual disappearance of weaker competitors, who can’t afford (or won’t risk) making the same moves as their larger competitors. As these weaker theaters go out of business, industry capacity shrinks and market share increases, both of which are positive for profit growth…
…and they don’t need MoviePass to accomplish this.
In fact, MoviePass is actually hurting the major theaters by helping to keep weak theaters afloat. This is why MoviePass is an enemy and a threat in the eyes of the major operators.
But don’t take my word for it…
“the road to getting a share of concessions — famously the most profitable part of the (theater) business — will be a bumpy one, especially given the antagonistic stance MoviePass has taken with industry leaders like AMC.” – TechCrunch
These are simple laws of business / economics.
Anyways… getting back to the money and critical mass, if MoviePass can raise another $800 million in funding, they may be able to gain enough critical mass to pressure the major theaters. Even bull leader, Ben Rabizadeh, is outspoken in his expectation for $1 billion in total fundraising. We’re in the same ballpark in this regard.
Of course, that would be positive for MoviePass. However, believe it or not, current shareholders might not benefit much, despite to the high risk they’re incurring. Here’s why…
The last round of funding priced at $5.50 with warrant coverage, which drove the stock down to $$4.50 (even though the stock was trading at $8 beforehand). The round before that priced at $6.50 with warrant coverage, which drove the stock down to $5.50 even though the stock was trading at $10 beforehand.
The rounds were both done at 30%+ discounts and included warrant coverage. The warrant coverage entices arbs to participate, but also leads to post-deal selling pressure. You see, arbs buy the units (the stock + warrant) and then sell the stock. If they get a decent price for the shares (which is a good bet, since they’re buying at a 30%+ discount to the prior day price) they’re left with a cheap effective price on the warrant.
On the last deal, those who were able to get $5.50 for their stock were left with a free warrant — a free 5-year MoviePass lottery ticket. No wonder they bought in — who wouldn’t?
Arbs don’t care about the value of the stock. They just need to sell at a good enough price to end up with a cheap warrant. The resultant selling pressure knocks the stock down. For HMNY, the knockdown has left the stock an additional 15% lower each of the last two times. This is common in deals that are structured like this — it also happened to my shares of SMSI last week.
Thankfully, SMSI doesn’t need any more money. However, MoviePass / HMNY does (again, based on the statements management has publicly made about year-end customers and utilization, among other things). In other words, a continuation of that discount / knockdown trend is to be expected.
The reason is simple…
HMNY’s share count is rising at an acceleratingrate. That increasingly reduces the long-term upside for investors (the “S” in EPS). This keeps institutions away (even bullish ones, because they know they can simply open an account with Canaccord and gets shares and warrants for a 30%+ discount when the next round comes up (spoiler alert: soon???).
That leaves retail investors to shoulder the load of an ever-larger share base. That load becomes harder to shoulder as more investors realize that the rounds of funding will continue (and with increasing regularity, because the cash burn is likely to worsen until they achieve enough critical mass to secure rev-share deals with the theaters — I’ll explain why shortly).
If you run the numbers using management’s statements + the last two rounds as guide, you’ll find that HMNY could end up with 1.3 billion shares outstanding before critical mass is achieved. At that point, the stock might finally be able to start rising, but millions of warrants would go into-the-money all the way up, raising the share count to something closer to 2.5 billion in my personal model.
I’m not making this stuff up. I’m simply typing numbers into a spreadsheet and seeing what comes out… same as I’ve done with every company I’ve analyzed since the early 90s.
This is why I’ve been talking so much about modeling the capital structure. If you haven’t modeled the capital structure (or don’t understand what that means), you’re investing with at least one eye blind.
And lest we forget, if they end up with 2.5 billion shares, a 20-cents share price will be enough to trigger Mr. Farnsworth’s 10% stock bonus… yet, common shareholders will have lost 95%+ of their money from current levels.
Market Capitalization Milestone Bonus. Mr. Farnsworth will receive a stock bonus based upon the Company’s achievement of certain market capitalization milestones during the term of the agreement, as set forth in the table below. Each award of common stock to a market capitalization milestone will vest upon the later of February 15, 2019 and the end of the applicable three-month period following the applicable date of the grant. The Company’s market capitalization for each applicable milestone and measurement period will be determined based on the market capitalization reported by Bloomberg LP.
Market Capitalization Milestone Percentage $100,000,000 3% $150,000,000 3% $200,000,000 4% $250,000,000 4% $300,000,000 5% $350,000,000 5% $400,000,000 7% $450,000,000 7% $500,000,000 9% every additional $100,000,000 thereafter (cumulated with the applicable immediately preceding milestone) 10%
Each milestone above is a separate milestone for which Mr. Farnsworth may earn the applicable percentage. Mr. Farnsworth will be entitled to earn the applicable percentage for each milestone only once.
In other words, management’s incentives are not properly aligned with common shareholders. I said this on the day that this comp plan was announced (and I believe I was still long the stock on that day).
The silver lining? The warrants being triggered would bring in $1 billion+ of additional capital. However, if MoviePass reaches that critical mass and eventually earns the maximum enterprise value ($28 billion) I outlined last week, that $1 billion will only add 4% to the market cap.
That maximum valuation (let’s round it up to $30 billion), divided by 2.5 billion shares, equates to $12 per share. From these levels, that sounds pretty good… until you realize that it took Netflix 17 years to achieve a $30 billion valuation.
And as I’ve said before, MoviePass is nothing like Netflix. NFLX acquires content once and shows it millions of times. There’s virtually no extra cost for a subscriber to watch an extra movie or show. That’s called a “scalable model”. In contrast, MoviePass pays $10 every time. Even if MoviePass accomplishes its goals (rev shares, etc.), the model can never be as scalable as NFLX’s.
Thus, from these levels, I believe that retail investors will endure several more funding events (even some of the mega-bulls agree), which I believe will continue resulting in dilution and stock price knockdowns before eventually, possibly, maybe, getting that $12 reward.
Final calculation — that “success scenario” only equates to a long-term average annual return of 6% for MoviePass loyalists.
Of course, that long-term success scenario valuation is dependent on everything that management, Canaccord, and Maxim have outlined (which more of us now know to be questionable).
Concessions are in doubt. The “Night At The Movies” vision is in doubt. This places the entire model in doubt. According to uber-bullish Canaccord, those two items represent 40% of MoviePass’ ancillary revenue opportunity.
If you believe Canaccord, MoviePass will get a 20% rebate on nearly half of the tickets they have to buy by 2022. If you don’t believe that, there’s another chunk of their opportunity out the window.
If you ask me, their true maximum potential (if I’m being kind) is closer to 16 billion or around $7 per share in my long-term model.
But wait… the entire theater industry only has a total market cap of around $10 billion. So, the bulls’ assumptions suggest that MoviePass will eventually attract a valuation of three times more than the entire industry has been able to achieve.
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Disclosures / Disclaimers: I have no position in HMNY. Nor is this is a solicitation to buy, sell, or otherwise transact the stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
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