By Harriet Lefton
Did Helios and Matheson (NASDAQ:HMNY) ever expect such a crazy roller-coaster ride when it acquired MoviePass back in 2017? It certainly seems unlikely.
For those who don’t know, MoviePass offers an online service app that allows subscribers to see movies throughout the US (one a day) for a $9.95 monthly subscription fee. In June it had already won over 3 million subscribers. Pretty impressive you would think. But such growth came at a big price.
A glaring problem quickly became apparent: the company loses money for each customer. Subscribers have been going to movies more than anticipated and MP has had to pay full retail cost for those movie tickets. The solution longer term: discounts from major chains and revenue shares with movie theaters. Bear in mind $9.95 for a whole month of tickets is an incredible deal- and in this case it proved just too good to be true.
The key debate now is whether HMNY will have a chance to put its long-term plans into action. It’s questionable. This week will go down in history for Movie Pass as the week it ran out of cash- leading to four days of outages and ultimately an apology from CEO Mitch Lowe. HMNY was subsequently forced to borrow $5 million in cash to turn the app back on. “We have handled the issues on the back-end, and our app is now up-and-running with stability at 100%,” Lowe wrote in a statement on July 27.
And a further statement has now been released. On July 31, the company “announced the implementation of several new measures aimed at accelerating the plan for profitability.” These include the vague revelation that ‘actions that have been implemented are currently cutting the monthly burn by 60%.” More specifically, we can see that HMNY place to increase the standard pricing plan to $14.95 per month within the next 30 days. It will also limit the availability of new movies for the first two weeks- starting with the blockbuster Mission: Impossible – Fallout. Other measures include more aggressive action against abuse of the service.
The statement also revealed that the company is “generating incremental non-subscription revenue of approximately $4 to $6 per subscriber per quarter.” This includes partnering with 3rd party media inventory to increase scale and reach of marketing efforts driven by data. However, even though these new measures sound promising, it is hard not to be skeptical at this point. From an investing perspective, the rewards certainly don’t seem to outweigh this nail-biting rollercoaster ride of disappointment.
And it seems like the Street feels the same. Only one analyst has published a recent rating on Helios and Matheson. Maxim Group’s Allen Klee issued a Hold rating on the stock (without a price target) on July 27. This was down from a more bullish Buy rating previously. He described the stock as “a high risk/reward situation” before adding “We remain optimistic regarding the potential for continued subscriber growth. However, due to the need for significant additional capital, we now rate the stock a Hold.” (To watch Klee’s track record, click here)
But even this cautious optimism didn’t last long. On July 31 Klee discontinued coverage of HMNY- effectively wiping out his most recent rating. The reason? “New information raising questions about the ability of HMNY to raise enough capital to continue as a going concern.” Specifically, Klee refers to the “cash burn” that has seen HMNY rack up a $45 million cash deficit for June and at least another $45 million deficit for July. The conclusion for investors: steer clear for now!