Helios and Matheson (HMNY): Should You Catch the Falling Knife?

As HMNY investors run for the hills, Maxim's Nehal Chokshi makes a bullish case as to why he still finds the tech stock a compelling bet.

Helios and Matheson (NASDAQ:HMNY) stock is getting a bullish vote of confidence to break its current fall, to the harsh tune of 32% down in valuation today- following a sharp 31% crash yesterday. What has sent investors into a panic on the company that owns a 92% stake in MoviePass, the future Netflix of the movie theater market?

The culprit is an SEC filing that exposed only $15.5 million in cash on deck to close out last month for a company burning through roughly $21.7 million in cash each month. Even the leading movie-theater chain in the U.S. AMC hosted a conference call where CEO Adam Aron questions whether MoviePass’ price model for its subscription programs is one that can stand the test of time.

AMC points out that MoviePass has shelled out for an average of $12 tickets in a bulk of hundreds of thousands- for subscribers that show up to see under 3 movies per month. This suggests a loss in profits of more than $20 per customer every month. Suddenly, tech investors questioned the sustainability of the MoviePass business, turning HMNY quickly on its head into a falling knife.

While Maxim analyst Nehal Chokshi acknowledges that the company’s cash position is “worse” than anticipated, he spots “better profitability,” continuing to defend a “path to a sustainable business model” in HMNY’s future. Though Chokshi notes cash by the end of April was not as high as he had expected, he attributes this to loftier-than-anticipated working capital needs that do not impact his long-term expectations.

Therefore, the analyst reiterates a Buy rating on HMNY stock with a $12 price target, which implies a whopping 900% upside from current levels. (To watch Chokshi’s track record, click here)

First, Chokshi argues that the “AMC earnings call comments likely do not take into account recent actions MoviePass has taken that reduced cash burn by ~35%, per 8K filed this morning,” adding: “While the 35% reduction in cash deficit to ~$14M/month run rate is a positive, we continue to believe capping usage is the best path forward to achieving a sustainable business model.”

Chokshi is aware of “notable” rivalry from private movie theater subscription platform and MoviePass’ chief competitor Sinemia, who has unleashed various new offerings. At Sinemia, subscribers have the option to purchase tickets as far away as 30-days in advance, where some wonder if MoviePass’ one-movie-per-day business model ultimately draws “abusive subscribers” to the theaters.

Even amid a backdrop of cutthroat rivalry, the analyst believes MoviePass is the true leader of the movie theater subscription service arena. Keep in mind, subscriber growth has shot up like a bottle rocket from 20,000 to nearly 3 million in under a year’s time, with a majority of 91% of U.S. movie theaters giving the green light to MoviePass. Unlike Sinemia, MoviePass has attracted viral recognition, where “much of its growth [has been] driven by word-of-mouth.”

Ultimately, “We believe that MoviePass’ subscription model presents greater optionality than Sinemia because with MoviePass, a subscriber has the choice to see less or more movies during a given month, rather than being restricted to a per month limit. Finally, we note that MoviePass has filed a patent infringement lawsuit against Sinemia, which may further impede Sinemia’s ability to operate,” surmises Chokshi.

TipRanks reveals HMNY has magnetized early strong initial bullish backing on the Street, with all 3 analysts in the last 3 months rating a Buy on the tech stock. With a monster return potential of 1,084%, the consensus target price towers tall at $14.33.

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