It’s not been a great year to be a Helios and Matheson (NASDAQ:HMNY) investor, to say the least. This is the company’s darkest chapter yet as the tech stock’s valuation has plummeted almost 90% in 2018. This all boils down the company’s 92% majority stake in MoviePass, a platform designed to be the future Netflix of the movie theater arena. For a company that was able to magnetize 20,000 to just under 3 million subscribers to its base without even reaching a full year passing, what the hell happened to dash investor confidence in such a blaze?
The idea is to entice subscribers to be the movie theaters to watch a movie per day, for a super cheap monthly fee of $9.95. What was once thought to be a box-office disruption, a game changer much like Netflix is now casting major shadows of doubt upon one key question: the sustainability factor. Sure, MoviePass is popular. Can this fast favorite among the movie theater market regain footing to bring in profits?
HMNY unleashed an SEC filing already in April posting a $150.8 million loss for 2017, quite a climb from the merely $7.4 million loss just two years ago. Additionally, the company pointed to a monthly cash burn rate circling $21.7 million. The top movie-theater chain in the U.S. AMC then held a conference call, which led CEO Adam Aron to poke holes in MoviePass’ price model for its subscription programs and just how long it can last. Then again, AMC has always found MoviePass threatening, dismissing it as a “small fringe player,” intent on shutting the company out from all its profits whatsoever.
Meanwhile, an independent auditor has big skepticism regarding MoviePass’ power to stay in the market. Even 37% of the platform’s very own subscribers cannot help wondering: is this great model ultimately fool’s gold? Then there’s a 32% that based on National Research Group’s latest study anticipate the company simply will not be able to continue long-term.
Next hit Tuesday, which ominously led this stock into sharply falling knife territory for the rest of the week. Another SEC filing unleashed only $15.5 million in available cash to close out April coupled with $27.9 million with merchant processors on deposit. HMNY understands the dire line it is walking here, as the filing points out: “If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned growth or otherwise alter our business model, objectives and operations, which could harm our business, financial condition and operating results.”
During last month’s yearly theater convention Cinemacon, it was in Las Vegas that MoviePass chief executive Mitch Lowe tried to ease a flurry of concerns from small-scale movie theater chains and their execs. In an interview with Vulture, Lowe commented: “They said, ‘Either you’re going to condition our customers that going to the movies should be less expensive and easier—and then you’re going to go out of business, leaving us holding the bag. Or, (b) you’re going to get so powerful, you’re going to squeeze us dry for all our profits.'”
Lowe countered, “And I said, ‘Both of those are wrong,'” adding, “What we intend to do is re-energize people to go back to the movies. If you want to share some portion of your increased profit with us, you help ensure our success. We don’t do well if you don’t do well. And they all, every single one of them, left here asking me to send them a contract.”
In an era following Facebook’s disastrous Cambridge Analytica privacy data leak, Lowe admits to Vulture his company pools some user data: “Of course we know what movies you’re watching; but we don’t know what car you drive,” continuing: “You’ve told us where you’re going to go to the theater. You said, ‘I want to buy a ticket to the AMC on 42nd Street and it’s a 7:00 showing.’ From that, we can look at all the restaurants and assume that you might like a Starbucks; have a coffee before you go.”
“We never were going to make our data available to others. What we’ve always said to the studios is that we’re using what people want to see and where they go to see it as a way to better market—but we’re doing the marketing,” explains Lowe, who notes that he is certainly learning from Facebook’s shadows: “But all this Facebook stuff has definitely taught us we need to be more clear and transparent with the customer. ‘Here’s what we’re collecting. Here’s what we’re doing with it.’ And you always have the opt out: Don’t use our service.”
While investors are fleeing left and right this week, according to the National Research Group study, subscribers are quite happy with MoviePass, which is pacing to achieve 5 million users by the close of 2018, taking a 9% slice of every movie ticket sale in the U.S. In fact, 83% of users indicate high satisfaction, beating out streamers of the likes of Netflix, Spotify, and even Amazon, with 84% having high odds to suggest others join on board.
MoviePass is playing it smart, not letting its subscribers see any same film twice, and the app will also block users from sneaking non-subscribers in on the deal. In fact, new users are the ones who usually leap to the movies in the opening three months of using MoviePass, an excitement that then simmers, which is financially encouraging. “Eighty-eight percent of our subscribers are already break-even or profitable,” Lowe suggests, pointing out: “That tells you 88 percent of our customers go [to the theaters] once or less a month and 12 percent go more. So the trick is getting our average down to a little over one.”
Maxim analyst Nehal Chokshi is a loyal bull, who may see a cash position starker than predicted, but stronger days of profitability still lie ahead for this challenged tech company boasting great potential. As far as Chokshi eyes the bigger picture, HMNY still is looking at a “path to a sustainable business model” at the end of the day. Any bigger-than-calculated working capital needs do not detract from the analyst’s longer-term estimates at play.
AMC may have taken a swipe at MoviePass, but Chokshi believes these criticisms fail to recognize the company’s actions to scale back cash burn by roughly 35%, according to the infamous Tuesday 8K. This 35% reduction in cash deficit to an around $14 million per month run rate is one the analyst cheers as a “positive.” That said, Chokshi acknowledges that the most strategic trajectory ahead to reaching sustainability in MoviePass’ business is to cap usage.
This tech player remains the standout leader of the movie theater subscription serve battle ground, says the analyst, who highlights that a whopping 91% of U.S. movie theaters have offered the service a nod. Compared to key nemesis Sinemia, MoviePass is a company that has thrived on “word-of-mouth” generating growth as well as viral popularity. With a subscription model offering more optionality, unlike Sinemia which narrows its users to a per month limit on top of a patent infringement lawsuit that could hit hard at Sinemia’s operational prospects, Chokshi gives the clear competitive upper hand to MoviePass.
Worthy of note, even amid this week’s investor scare, the analyst rates a Buy rating on HMNY rating with a $12 price target, which implies a monster 1,835% upside from current levels. (To watch Chokshi’s track record, click here)
“You know, it actually is one of the best things in the world to have a company that no one believes in,” Lowe cheekily says. “Because we have all this free runway to build the business. And suddenly, people are going to turn around and go, ‘Holy crap, look what they’ve done! These guys are unstoppable now. And no one tried to create a competitor.'”
HMNY chief executive Ted Farnsworth expressed to Variety that together with Lowe, they have $280 million, complete with a $375 million line of credit on deck, and these two are not at all worried about capital: “Since day one, people have been saying we’ll run out of money,” asserted Farnsworth, contending: “I assure you capital is not an issue. I’m sitting on hundreds of millions of dollars of dry powder, and I’ve got bankers and debt-financing companies calling me all the time. They know they’re looking at an Uber or an Airbnb. This is a unicorn company.”
When Tuesday hit, Farnsworth came back with even more conviction, indicating to the New York Post, “I’m not worried about the cash burn at all.”
TipRanks indicates a strong bullish consensus is still in this tech player’s corner; for now. All 3 analysts polled in the last 3 months unanimously rate a Buy on HMNY stock. With a mammoth return potential of nearly 2,175%, the stock’s consensus target price towers at $14.33.