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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 and context 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.
This weekend proved to be one to forget for MoviePass (HMNY) bulls. Box office registers started lighting up on Thursday and didn’t let up. Revenues were up 129.9% vs. the same weekend last year, pushing the year-to-date tally to $5.5 billion, up 6.4% vs. 2017.
According to industry forecasts, this weekend’s maelstrom now promises to continue through July. Of particular concern for MoviePass investors, June receipts are being dominated by major-studio releases — the very type which MoviePass has little hope of ever gaining leverage against.
This presents a worsening cash-burn challenge for the company. It also promises to pressure shares of HMNY, which has already taken too many trips to the “ATM” via its ongoing At-The-Market offering of common stock.
Because of this, I just increased my short position in HMNY.
Interestingly, HMNY CEO Ted Farnsworth may finally be finding religion when it comes to operating disclosures. He actually foreshadowed this situation last week.
During an interview, he intimated that the company would likely foot the bill for a bearish 7-8% of box office receipts during blockbuster-laden weekends. This is up from the “over 5%” figure provided in the most recent MoviePass presser.
Accordingly, I’ve updated my MoviePass model, which now predicts significantly more cash burn and dilution for the remainder of June, despite remaining conservative relative to Mr. Farnsworth’s 7-8% comment.
“Over 5%” was already an ominous number for the company. Subscriber utilization rates have remained dangerously high since the service launched its unprecedented $9.95 pricing last August. According to internal data shared via an executive interview in September, utilization should have dropped off several months ago.
MoviePass has been around for five years, so we have a wealth of historical data. At $39, the average customer would go to four movies a month. At $29, the average dropped to three movies a month. When MoviePass went to $19, the average customer went to two movies a month. So we think we can be profitable on the subscriptions at $9.95 and then make the real money from the additional revenue sources…
…Based on our historical numbers, MoviePass will be similar. People will use it three times in the first month. The second month, they’ll use it twice. Then, in the third month, they’ll use it once or less. After that, they’ll only use it once in a while.
– Ted Farnsworth via Executive Interview with Mark Gomes (September 22, 2017)
If you run the numbers on Mr. Farnsworth’s original assertion, you’ll find that utilization for June should come in 1.0 movies per subscriber. However, based on the company’s recent comments and box office results, the number looks set to be closer to 2.5. That’s 150% above expectations… and enough to drive $64 million of cash burn for the month!
To date, the only meaningful drop-off in utilization has been spurred by MoviePass usage policy-changes. The new measures aided May results. However, the positive impact has already started to reverse. Further, the changes have been accompanied by a sharp drop-off in new subscriber activity. Apparently, MoviePass evangelists are now souring on the service. This catch-22 has been long feared and is now coming to fruition.
This stems from the fact that MoviePass’ initial (and subsequent) customer-behavior estimates have fallen woefully short of expectations. This has precipitated a cash crunch, driving shares of HMNY down some 99% from its 52-week high.
Things appear poised to worsen in the weeks ahead. The stock now sits at 35-cents. According to my share-dilution model (which to date has UNDER-estimated the deleterious impact of the company’s financings), HMNY’s ATM is expected to push the stock below 20-cents in the weeks ahead.
As I forecasted months ago, this summer’s blockbusters are catalyzing a record month of cash burn. Dilution-model calculations show that this could force the company to increase its share count by a stunning 50% by this time next month.
Without a commensurate influx of new shareholders, supply will swamp demand, causing the stock to fall by a similar amount.
Unfortunately, it’s more likely that its roster of supporters will shrink, as this weekend’s results spark a rush to the exits. This will occur if even a small percentage of longs sell. This is probable, since some will inevitably be drawn to the idea of buying shares back next month at half the cost.
An increase in short selling will have the same impact. The appeal has been sweetened in recent weeks, due to 1) the summer blockbuster schedule and 2) the cost to borrow shares, which has ironically plummeted due to HMNY’s relentless share printing.
At the box office, negative catalysts are abounding… and their impact has only begun to be felt.
Hot on the heels of the estimate-beating Ocean’s 8, Incredibles 2 has come out of the gate on fire. It was already forecast to generate over $150 million going into the weekend, surpassing the $135 million animated record (set by “Finding Dory”). However, by Saturday, industry estimates had soared to $180 million.
On deck, Jurassic World: Fallen Kingdom is set to be the next big-time smash. Overseas, it opened early to avoid the World Cup, but is still making a play for the record books. It might top $500 million worldwide before it even opens in North America (on June 22).
Adding insult to an already-disastrous weekend for MoviePass, its own feature, Gotti, is officially a bomb. The film was met with an utter lack of interest.
Judging by its Rotten Tomatoes score (average: 2.6/10 from 20 critics), it would appear that Lionsgate was right not to move forward with it. The $10 million movie is estimated to have made less than $2 million across 503 theaters this weekend.
That’s not a record-low debut for such a release, but as one industry watcher put it, “it’s nothing to be proud of either”.
FYI, $2 million represents about 200,000 tickets. That’s just 1 for every 15 MoviePass subscribers. So, despite its best efforts, MoviePass motivated less than 7% of its base to go see the film… for free, no less (and that’s if we assume that every Gotti moviegoer was a MoviePass customer — which is, of course, preposterous).
Those who blame it on the presence of Incredibles 2 as a competitive alternative will only feed into the bearish dilemma facing MoviePass. As I’ve been saying, MoviePass Studios’ offerings won’t stop moviegoers from seeing the movies they want to see. Rather, they will only stimulate increased utilization (to see the MoviePass Studio films).
This presents two problems: 1) if the movies’ reviews aren’t stellar, as has been the case thus far, their downstream value will be de minimus, which will exacerbate the fact that 2) MoviePass is paying $10 per ticket for people to go see their movies, but only getting a fraction of that back, accounting for production costs, marketing costs (including marketing opportunity costs), partners’ stakes, etc.
Speaking of reviews, while all of this is happening, the average review for American Animals is starting to fall prey to more-sanguine critiques, indicating that the initial hype was bought and paid for. This points to the highly competitive nature of the film industry – the most promising properties get scooped up by the majors, which is why they represent a dominant (75%) and growing share of the movie-industry pie.
Thus, HMNY shareholders are counting Mitch Lowe and Ted Farnsworth to single-handedly out-select, out-maneuver, and out-produce the big boys with a budget that is multiple orders of magnitude below that of its goliath peers.
Exemplifying this reality, American Animals cost $3 million and has barely covered 10% of that in theaters (an amount that MoviePass has largely paid for). Of course, its rolling release schedule is partly to blame, but the falling reviews won’t help its cause.
Nor will major theaters, which haven’t been eager to support the movie offerings of the antagonistic upstart. Whereas major films open on thousands of screens, MoviePass has struggled to attract more than 500 takers.
So, while the company has claimed victory in attracting $35,000 per screen in its opening weekend, the counter argument is that the denominator (the number of screens showing the movie) was JUST FOUR!
Clearly, MoviePass isn’t going to make shareholders rich by producing 12 indy-level movies annually, even if they generate twice the average revenue of the average indy (especially if they are footing the bill for most of the tickets).
But this is just the latest of many bleak revelations in the ill-fated MoviePass saga.
Investors now have the following upcoming issues to suffer through:
- Continued success for Incredibles 2, along with the release of Jurassic Park, Sicario, and Ant-Man over the next three weeks, respectively. Also, Mission Impossible: Fallout and the Teen Titans animated feature come out on July 27.
- This week, HMNY will hit 30 consecutive business days below the $1.00 minimum closing bid price requirement. Accordingly, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.
- Bulls have been talking up the prospect of ancillary revenue increases, but I’ve covered that topic many times in my past posts. However, neither they nor I have yet to factor-in the start-up costs / losses from its MoviePass Studios venture. With Gotti and American Animals recouping just a fraction of their production costs (never mind marketing), these films will surely weigh negatively on cash flow for the foreseeable future. Yes, they may profit over time, but MoviePass can ill-afford additional sources of near-term cash burn.
- According to my model (which, to date, has proven too bullish), June/July cash burn threaten to bring HMNY dangerously close to exhausting its $150 million ATM, necessitating the need for the company to launch a new ATM or other form of financing.
- June/July cash burn, coupled with HMNY’s low share price will spur concerns that it will soon reach its share-authorization limit. I currently estimate 125M shares of issuance in July, bringing HMNY to a total of 466,821,480 shares.
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Disclosures / Disclaimers: I am short 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.