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.
I’ve updated my MoviePass model to adjust for the latest figures presented by management. Key points:
* MoviePass had 2.7 million subscribers as of May 16. That’s a big shortfall from my 2.9 million estimate. As a result, I had to significantly lower my year-end subscriber estimate from 5.67 million to 3.85 million.
* Operating expenses are much higher than I expected. I’ve adjusted the numbers up to account for this.
* Ancillary (non-subscriber) revenue is growing much slower than I expected. As I’ve presented before, I expected advertising revenue to be low (among other reasons, because people don’t spend much time in the app!).
However, I expected to see more kickbacks from theaters. It could just be that their “relationships” are really much less meaningful than they’ve portrayed (shocking). That’s no surprise though. I had been wondering why theaters would be willing to give more MoviePass a cut on anything more than the extra visits MoviePass catalyzes.
Well, it seems that maybe they are. I’ve adjusted the numbers down.
Am I the only one who finds it funny that nearly all of my numbers proved to be too bullish? Perhaps now the bulls can see that I haven’t been a “bashing bear”.
Either way, it’s all good. I’m used to being maligned. Long-time readers know that I’m merely an analyst who models what I see…
…more like a “numbers monkey” than a bashing bear!
* MoviePass also released a chart showing the change in utilization catalyzed by their initiatives to cut down on abuse. I’ve also updated the model to account for this.
The drop-off is nice (and overdue), but take note of the fact that utilization doesn’t drop off from cohort to cohort. This highlights the problem I first raised as the stock hit its peak — people aren’t slowing their initial usage much!
Worse (for those seeking to gain trust in management), the data was massaged to optimize the appearance. They did this by using May utilization numbers from May 1 through May 10. Check the calendar and you’ll see that May 1 was a Tuesday and May 10 was a Thursday.
In other words, the 10-day period only included one Friday and one Saturday. Imagine if our work week worked like that!
If you go to boxofficemojo.com, you can see the impact for yourself. Not only did their method avoid a full weekend, it also failed to recognize that the first week of May was a big letdown week for theaters, because “everyone” had gone to see Avengers: Infinity War on Friday, Saturday, and/or Sunday.
The result was a box office that averaged just $27.7 million per day during the first 10 days of May, versus $42.2 million in the three days that followed.
Using that math, MoviePass utilization has actually INCREASED in May!!
But using that math would be as unfair as the math they used. To be fair, complete weeks should be used, in which case, the number is only $29.6 million. So, the chart they provided was misleading by a factor of 7%. In other words, the data is still positive, but not as positive as they’d lead us to believe.
By the way, June will have five Fridays and five Saturdays. Just sayin’.
These are two of many reasons why I originally dropped it from my list and portfolio back in October. It’s also the reason why the company has been forced to dilute shareholders so much.
So, while this drop-off is nice, I don’t know what else they can do to get the utilization number down to the sub-1 levels needed to spur profitability (aside from retrenching, as I suggested in my last post).
That being said, the impact on the company’s cash burn is BIG (in a good way).
My prior model had them burning $470 million between May 1 and year-end. My updated model has now has them burning “just” $170 million between May 1 and year-end.
In other words, once its current ATM is complete, I believe they may “only” need to raise another $20 million to get them through the year.
But that’s not cause for celebration.
I believe that the $150 million ATM in still underway and will be utilized gradually as that need the money. I estimate that they only need 50% of it to get through July and don’t expect that they’d raise more than that until necessary (since the stock is down around 70-cents).
So, the good news is that the cash burn has been cut by more than 60%, but the bad news is that the stock is likely to be consistently pressured by the rest of the ATM… until they need to initiate another financing.
When it’s all said and done, I think the total shares outstanding will be somewhere around 300 million at year end and their revenue run rate somewhere around $360 million.
At current levels, that would value the company at around 0.5 times revenue. However, I would continue to caution against putting a revenue “multiple” on this business. I currently anticipate an additional $215 million in losses for 2019.
This is validated by CEO Farnsworth’s claim that they have enough cash for 17-months. This is thanks to the company’s $300 million “equity line of credit”, which:
- Requires them to sell more shares, creating more exponential dilution, which I anticipate will continue to pressure the stock.
- Implies that they will burn $300 million between now and mid-October 2019 (17-months). Based on my latest 2018 forecast, they will burn $160 million of that between mid-May and year-end.The remaining $140 million will be burned by mid-October 2019. Apples-to-apples, that’s essentially flat with Jan to mid-Oct 2018 (adjusting for the new anti-abuse measures). So, assuming a near-flat cash burn in Oct/Nov/Dec 2019 vs. Oct/Nov/Dec 2018 ($80 million), I derive my total 2019 cash burn forecast of $215 million. As usual, my analysis is all based on management’s own commentary, so it’s likely as bullish as it can be.
Speaking of management’s commentary, Mitch Lowe blew a hole in another one of Ted Farnsworth’s claims by sharing that 80% of MoviePass customers go to less than 4 movies per month. That means that 20% go to more than 4 movies per month. This counters Mr. Farnsworth’s recent claim that 88% of their customers are profitable.
So much for that. The wonders never cease.
Conclusions: The reduced cash burn is a step in the right direction, but that’s meaningless if you’re hiking from NYC to LA with a dwindling amount of cash.
To make a long story short (no pun intended), the massive amounts of dilution will continue. This will put a cap HMNY’s potential upside while continuing to present substantial downside risk.
Most of all, management’s comments regarding 2019 call into question my decision to turn neutral on the stock last week. After processing Mr. Farnsworth’s $300 million / 17-month comment, I am reinstating my short call effective immediately.
I would have done so last week, but I decided to wait for the game-changing acquisition Mr. Farnsworth promised to announce by Saturday… which, of course, didn’t happen.
No matter. I wasn’t holding my breath.
In fact, when someone asked, “what do you think Ted is buying?”
I said, “More time.”
p.s. This weekend, I saw Deadpool 2, the latest in this year’s long line of summer blockbusters. It was EXCELLENT (which is bad news for HMNY).
This week, Solo (the latest Star Wars movie) comes out.
FYI, Donald Glover — via his alter-ego “Childish Gambino” — is suddenly on fire with his Billboard-topping hit “This Is America” (along with its white-hot and highly-controversial video). This could add fuel to Solo’s fire.
It all goes to explain why I’ve been receiving an influx of communications from investors who have switched from HMNY to SMSI. I first opined that doing so would be a profitable move when they were sitting near the same levels (actually, HMNY was higher). Since then, HMNY has fallen about 60% and SMSI has risen about 20%.
I continue to have the opinion that swapping one for the other holds more promise to make HMNY shareholders whole (though becoming “whole” is becoming more improbable with each passing month).
- SMSI Q1 Results: Sprint Ramp Confirmed & T-Mobile Discussed!
- “Top Ten Stocks” Update (and note to HMNY watchers): AMC & GAIA Report Stellar Earnings!
- Are SMSI’s Unlocked / Hidden Assets Worth Over $20 Per Share?
- HMNY’s ATM Offering: Where’s The Stock Going Next?
- Smith Micro Raises $7 Million (At A Premium) To Accelerate Its Momentum
- Videocast: AEHR 10-Q, MoviePass Update
- AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Major Update on SMSI
- SMSI’s Safe & Found App: 100,000 Downloads & Counting
- MoviePass Projected To Burn $600M In 2018
- SMSI: Riding A New Trend & Making Its Latest Comeback
- Mark Gomes Research
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Disclosures / Disclaimers: I have no position in HMNY. 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.