Long-time readers should note some significant changes in how I communicate in the public domain. The primary 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 or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece 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.
Canaccord’s Austin Moldow released an HMNY update yesterday. In typical Moldow fashion, he contradicted himself on several fronts. For example, he stated that MoviePass management has decided not to grow faster to avoid the need for raising more capital. However, he reiterated his forecast for 12M subs by 2022.
MARCH 23 UPDATE: MOVIEPASS JUST LOWERED THE PRICE OF THEIR ANNUAL PLAN FROM $105 TO $89.95. TO ME, THIS IS VERY BEARISH.
YESTERDAY, WE HEARD (FROM CANACCORD) THAT THEY’RE NOT TRYING TO GROW FASTER TO AVOID GREATER CASH BURN. TODAY, THEY LOWER PRICES. THIS TELLS ME THAT: 1) THESE GUYS CAN’T BE TRUSTED, 2) DEMAND FOR THE SERVICE IS SLOWING DOWN RAPIDLY, 3) THEY’RE NOT TRYING TO SLOW THINGS DOWN, AND 4) MY 2018 CASH BURN MODEL NOW PROJECTS THAT THEY’LL NEED OVER $500 MILLION OF FUNDING BEFORE YEAR END.
I START TO SAY SOME NICE THINGS & THESE GUYS PULL ANOTHER STUNT… WOW.
THE REST OF THIS ARTICLE HAS BEEN EDITED TO REFLECT THIS CHANGE.
He also said that they have a self-funding financial model (UPDATE — YES, BUT IT ALSO BURNS A LOT MORE MONEY THAN IT FUNDS ITSELF WITH… IT’S FUNDING ITSELF; JUST NOT WITH ANYWHERE NEAR ENOUGH MONEY… NICE TRICK OF THE TONGUE). However, he also believes that the 12M sub level (in 2022) is where MoviePass “should evolve to yield considerable bargaining power”.
Mr. Moldow, 2022 is 4 years from now. MoviePass can’t self-fund until then. They need to yield considerable bargaining power before then!
Of course, Canaccord will earn millions every time MoviePass raises another big round.
In the meantime, he readily admits that MoviePass is still buying about 6% of all movie tickets in the U.S.
That’s interesting because they only claim to have purchased around 1 million tickets for Black Panther. That’s “just” 1.5% of the U.S. ticket sales (vs. the 6% mentioned above). 1.5% actually makes sense because MoviePass has signed about 1% of U.S. moviegoers.
However, the Top 27 MoviePass movies was publicly revealed
last night. Add them all up and you get somewhere around 10 million tickets purchased. Last year’s top 27 movies represented 60% of the industry-wide total. If we apply that to MoviePass’ top 27, it would imply that they’ve purchased about 17 million tickets to date.
That’s very close to the 18 million estimate in my model. So, it appears that Mr. Lowe is telling us the truth about one thing — MoviePass’ high utilization rate. However, that’s not good news for their cash burn. It appears that frequent moviegoers are indeed dominant in their customer base, as I have been warning for months.
Moldow also admits that MoviePass is only earning discounts on about 6% of the tickets it purchases. Running the math on that, MoviePass is only getting back an average of about $0.13 on each ticket they buy.
Yes, 13-cents… out of 11 dollars.
I’d like to say that they’re going to make big headway here, but they are only “optimistic about bringing on mid-tier partners”. Optimistic means it isn’t happening yet…
…and that’s just in the mid-tier. In other words, they’re only signing the little guys.
Clearly, they’ve got a lot more work to do.
It’s not all bad though. According to Canaccord, studio marketing revenue is now close to 50-cents per sub per month. I find that hard to believe, but I have to. So, I’ve updated the model to reflect that $1 million per month.
Canaccord also stated that only 20% the base is currently on an annual plan. That means that roughly 80% are paying monthly (assuming there aren’t many on the multi-month plans that were offered late last year). UPDATE: In addition, about half of new signups are for the $9.95 monthly plan, with the other half signing up for their annual subscription offering.
This has been all reflected in my updated cash burn model.
As compared to my last model, the Feb-Dec cash burn is now $37 million lower. That sounds big until you realize that my cash burn estimate for 2018 is still $609 million, over half a billion dollars more than they have at their disposal.
At the Roth Investor Conference, investors heard Mr. Farnsworth say something along the lines of, “I probably shouldn’t say this, but we won’t need to raise any more money.”
…he probably shouldn’t have said that.
Running all of the numbers that management has given us, I (still) don’t see how they can possibly close that $600M gap based on their current progress (signing revenue-generating deals, stemming the utilization issue, etc). Everything they have said suggests that they’re currently pulling in about $30 million per month from subscriptions and $2 million per month from discounts and other ancillary revenue.
That’s $32 million in monthly revenue. It sounds like a lot, but my model says that they’ve been SPENDING over $50 million per month on movie tickets, marketing, R&D, etc…
…and I expect that expense number to spike by 60% and average $80 million per month during the April/May/June/July gauntlet.
By my reckoning, they don’t even have one of those months in their bank account.
Of course, I’ve already heard every bull’s argument. In fact, I agree that their success in getting people to attend specific movies could be a good thing… but only if they can influence the movies we go to see, as opposed to stimulating us to see more movies.
According to my research, that’s not the case.
For the most part, people are going to see the movies they would normally see no matter what… and then, they’ll see additional movies they’re enticed to see.
For example, my better-half and I saw Game Night last night, a movie we normally wouldn’t see in the theater (but glad we did – it was great / very funny). So, that’s $23 out of MoviePass’ bank account… and it won’t stop us from going to see Avengers, Solo: A Star Wars Story, Deadpool 2, The Incredibles 2, or Jurassic World.
Those will all come out in April / June… and there’s no way that Disney, Fox, etc. are going to give up a piece of the action. They don’t need anyone’s help to fill seats. Just advertising.
The average moviegoer attends 0.5 movies per month. The average MoviePass customer has been attending closer to 2 movies per month. Those extra 1.5 movies per month requires MoviePass to spend about $30 million (again, per month).
Meanwhile, they are only pulling in $2 million from ticket discounts and advertising. In other words, the more movies people attend, the more they lose… and the only way to fix that is to increase their per-movie discount/marketing/other revenues by 1,400%. Until last week, Mitch Lowe was talking about “the data” and how they were going to use it to create a “night at the movies” to closet that 1,400% gap.
That’s why I’ve been trying to focus the bulls on the utilization rate. For months, the staunchest bulls told me that the numbers didn’t matter. Well, the leader of the bulls finally capitulated last week (but stopped short of acknowledging that the number do matter).
I’ve also been saying that utilization wasn’t dropping fast enough, which indicated to me that MoviePass’ customer base was dominated by frequent moviegoers. Well, Canaccord finally admitted yesterday that monthly frequency “is declining (albeit slowly)”.
That’s exactly what I’ve been saying (and fearing) since the stock was $12 in the November time frame.
“Albeit slowly” is not good enough. It should be much slower already! At least that’s what Mr. Farnsworth promised back in September. Sigh.
Things aren’t about get any better either. In fact, it’s about to get a lot worse. As bad as things have been over the past three months, they’ve had the benefit of operating within the the slow period for movie going — between the holidays and the summer blockbuster season.
Ominously, the summer gauntlet starts early this year. Ready Player One
kicks it off next week
and is expected to do $260 million
A few weeks after that, things go off the rails.
Avengers: Infinity War (the most anticipated superhero movie ever) comes out on April 27. Black Panther kept seats full for a month. Avengers should be much bigger, but won’t have to be, because Deadpool 2 comes out on May 18. Then, Solo (which looks fantastic) comes out on May 25. Incredibles 2 will be released on June 15, and then Jurassic World launches just a week after that… and we have potential sleepers — like Ocean’s 8 and Dwayne “The Rock” Johnson’s Rampage — sprinkled in between.
Of course, these releases will produce some ad revenue for MoviePass. However, as I’ve discussed, they’re only pulling in $2 million in ancillary revenue per month. In contrast, IMDB forecasts that the two-month blockbuster gauntlet will generate $2.5 billion in domestic receipts.
Compare that to Black Panther, which killed it, but still “only” did $500 million in February.
Looking at my new model, it still appears that they’ll need two large rounds of funding before mid-July. Management is denying the need for even one round, but that math just doesn’t add up unless they have a secret weapon they’re not telling anyone about…
…and as we all know, they’ve made a habit of telling everyone everything (including a bunch of things that don’t even exist).
The Bottom Line: When I first wrote this article (12 hours ago) I originally said, “Despite my continued pessimism, this represents the second straight improvement in my outlook. It’s not enough to make me bullish (or even neutral), but it’s a solid step in the right direction.”
Unfortunately, with this morning’s news and data points, I had to spend half the morning redoing my model and this article… all for the worse.
p.s. I think one of my prior posts hypothesized that Canaccord’s Austin Moldow was a corporate “fall guy”. Basically, someone to take responsibility for covering a stock that none of the managing directors want to have on their record.
That’s right… none of his picks have gone up and his average return is negative 42%.
Of course, I’m one to talk, because TipRanks has given me a bad rating as well. However, those who have followed my picks can see that TipRanks counts my short-term calls as long-term calls, includes my hedges as picks, and somehow omitted HMNY’s run from 3 to 38 (and its decline from 12 to 3). Oh well. LOL.
That’s why TipRanks is best used to track sell-side analysts. There’s little ambiguity in sell-side initiations / ratings. Unfortunately, Mr. Moldow’s record is unambiguously the worst I’ve seen since Richard Pearson
(who seems to make a habit of smearing companies and others as a possible smoke screen for what might be a stock manipulation scheme
Either way, that’s not a good person to be compared against.
Just to reiterate, I’m generally a fan of Canaccord’s work (particularly that of Richard Davis). I have nothing negative to say about Mr. Moldow’s integrity. He’s just not an analyst you want to put your money behind.
Let the buyer beware.
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Disclosures / Disclaimers: I have no position in HMNY, nor have I traded the stock since launching this blog. Further, I am not aware of anyone who has been short HMNY or its derivatives since launching this blog. This is not a solicitation to buy, sell, or otherwise transact any 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.
I undertake no responsibility to update my disclosures and they may therefore 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. 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.
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.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.