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.
After a busy week of drilling into the exciting new events going on at Smith Micro, I finally got some time to take a look at what’s happening at MoviePass.
As I predicted months ago, shares of HMNY have fallen from $12 to $2. Seeing this coming was not a matter of luck, but simple mathematics.
Combining data from HMNY’s last couple of offerings with my MoviePass profit/loss model, I built a new “dilution model”. The purpose was to predict when the next rounds of funding would take place… and what they would do to the stock.
As most of my readers know by now, my first funding prediction was dead on.
The model predicted the company would raise $100M in April. In turn, the calculations suggested that the offering would knock the stock from somewhere around $4 down to about $2.40. Bulls scoffed, partly because HMNY CEO Ted Farnsworth had publicly stated, “I probably shouldn’t say this, but we won’t need any more funding.”
To that, I replied, “He’s right… he probably shouldn’t have said that.”
Sure enough, on April 18th, a major round of funding was announced. The following is a discussion I had with a bullish shareholder, shortly after the press release went out:
Sure enough the stock fell by as much as 40%+ the next day.
But not everything about the prediction was accurate. I expected the company to raise $100 million… but they couldn’t generate enough interest. As a result, the company settled for just $30 million.
To fill their remaining needs (and it’s still clear from my model that they have significant needs), HMNY initiated a $150 million at-the-market (ATM) offering. Aptly named, an ATM is basically the same thing as printing money.
However, instead of it being the U.S. government printing dollars, it’s HMNY printing shares of stock AND SELLING THEM INTO THE OPEN MARKET AT ANY PRICE (currently $2). That’s what they’re doing RIGHT NOW. It’s a like a reverse buyback (and the biggest one I’ve ever seen, representing somewhere around 100% of the current outstanding shares).
They are doing this via Canaccard (the company that has been telling investors that the shares are worth $15). Canaccord will be receiving / selling the shares from HMNY and sending the cash (minus their cut) back to HMNY to fund MoviePass losses.
Question: Why would they sell $150 million worth of shares at $2 if they thought it was worth more? Why not take out loans? It’s simple. No institution will lend them money or pay more than $2 for their stock.
Of course the company has done a lot to improve their operations. They’ve also remained active in the news. However, while all of their new initiatives should help to stem the bleeding, none of them (not even all of them combined) did much to significantly alter my MoviePass model or dilution outlook.
As I’ve said before, MoviePass might turn out to be a success, but current shareholders will take losses until the funding / dilution issue is behind them. I might buy the stock at some point (and will immediately announce if and why I do)… but right now, I’m more inclined to wait for a little bounce and then short it.
With the incredible lineup of movies on the 2018 schedule, my model only sees one ray of light (Aug-Oct) for investors between now and year-end.
Other than that window, the company will be needing so much cash that the shares simply won’t be able to sustain the $2 level for long. The $150 million ATM is underway and my model predicts that it will require constant printing/selling to get the company through the summer blockbuster gauntlet (which will persist through July).
Raising $150 million with the stock at $2 will require at least 75 million shares to be issued. Running the numbers, the most likely scenario is that HMNY is sitting somewhere around $1.50 in mid-July.
It could be a little higher than that, but it could also be a lot lower than that. This is especially if retail investors finally realize that it’s best to let the stock fall and think about buying HMNY after the summer blockbuster season is over.
The key word is “think”.
That’s not to say that there won’t be tradeable bounces, but timing them is reserved for investors who are good at catching falling knives. Personally, I believe it will be much easier to short the pops than time them.
Ever since initiating this blog (back in January) I have refrained from shorting the stock. I did so to establish neutrality in hopes of helping investors understand what was destined to happen to this stock.
It worked. I’ve received a lot of thanks from investors who were avoided HMNY recent crash. Looking ahead, my model predicts further stock-price declines to come.
That being said, if I haven’t convinced investors by now, I never will. Accordingly, I am lifting my self-imposed restriction on trading the stock. So, I am now actively looking for opportunities to short HMNY and/or make options bets that will profit from a decline in the stock.
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Disclosures / Disclaimers: I have no position in HMNY (yet). However, 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.