It’s been a challenging month to be a Helios and Matheson (NASDAQ:HMNY) bull, with the stock having lost close to two thirds in value since the start of May. The root of HMNY’s trouble comes down to MoviePass, and a bigger question hanging overhead: sustainability. An SEC filing turned this promising tech stock to falling knife overnight and sent HMNY investors running frantically for the hills. Crunching the numbers, the company’s cash on deck of $15.5 million seems to be eclipsed by a cash burn towering at around $21.7 million in cash each month.
The most recent plunge follows a bearish opinion from Seeking Alpha blogger Julian Lin, costing HMNY another approximately 11% in share weakness today.
Though this company scored a profit in its last quarter, Lin urges “caution” here when it comes to falling for “accounting tricks.” This is a stock quick-on-the-dash to the market floor and Lin is out with a “warning” to “not buy into this thinking that this is the next big thing.” When calculating the numbers and attempting to predict prospective earnings, Lin comes to a stark conclusion: “It isn’t pretty. HMNY remains a high conviction short,” adding, “even when using the most rosiest of rosiest of assumptions.”
Here’s the gimmick, from Lin’s eyes: Yes, technically the tech player posted first quarter numbers that entirely trounced expectations, serving up an impressive $0.09 in EPS that beat out the Street’s -$1.38 forecast. When annualizing this, that marks EPS of $0.36. That said, Lin wants to “set the record straight,” acknowledging, “For a stock growing subscribers at an obscene rate, at first glance this screams deep value.” However, “When looking at their income statement, we can see a line titled ‘Change in fair market value – warrant liabilities’ of $93,608,200,” underscores Lin, who adds: “This huge number helped swing their results from deep negatives to the positive territory.”
“Cash flow doesn’t lie,” continues the blogger, asserting his bearish stance: “We can see in the statement of cash flows that this is really a one time adjustment as it does not show up as cash and is subtracted out to arrive at cash from operations.” After all, this is a company with original warrants of $14.31 written off the table, which the blogger attributes to such a drastic dip in valuation that a lot of prior issued warrants have been rendered “virtually worthless.” It seems to Lin that the HMNY team is masking just how bad the actual cash flow burn of the last quarter was- one soaring past $68 million.
What about investors who consider a stock whose valuation circles close to $0.60 per share “cheap?” While Lin believes this suggests $31.8 million as a market cap, he questions this, finding the stock substantially “overvalued,” even with bullish assumptions. When trying to angle for costs down the line, the blogger notes a company that posted $47 million in subscription revenue in the latest quarter coupled with $136 million in cost of revenues. Lin dives into the mathematics, calculating that for every dollar of subscriptions, HMNY shelled out $2.88. Meanwhile, the company’s subscription revenues shift each month between $7 and $10, so even with an encouraged bet of $9, this suggests movie tickets cost $10. In other words, with subscribers seeing 2.6 movies each month, this translates to a cash deficit each month of $17 per subscriber.
Take into account the expense required to magnetize 10 million subscribers to HMNY’s base. Lin says under the assumption that subscribers rise at a pace of 15% each month and assuming when HMNY hits 5 million subscribers the company gets $3 per ticket in concessions to a “magic” 10 million, it appears roughly $700 million more in funding will be needed. With a base now of $30 million, Lin sizes up a challenging trajectory that will put shares under hot water for selling more than 23 times that amount in market cap.
Essentially, the more Lin breaks down the numbers, the more he sees underwhelming prospective return for a stock that frankly is already beleaguered in attempting to remain in business. This is not even factoring that a 15% monthly subscriber growth rate is quite “aggressive” to maintain to reach 10 million subscribers; and Lin finds it unlikely movie theaters want to give the whole of their income over to the company.
In a nutshell, “HMNY reported earnings which looked better than they really were due to non-cash flow adjustments. Because my overly optimistic assumptions are still unable to show that HMNY is cheap, it is clear that HMNY does not currently present any potential value and is a strong short candidate. Target price remains $0,” Lin concludes.
According to TipRanks, three-star blogger Julian Lin has a yearly average return of 3.2% and a 61% success rate. Lin has an average return of 21.6% when recommending HMNY and is ranked #2,171 out of 6,474 bloggers.
TipRanks indicates analysts on Wall Street tend to disagree with Lin’s bearish perspective on HMNY stock, as all 3 analysts polled in the last 3 months rate a Buy on HMNY stock. With a massive return potential of nearly 2,554%, the stock’s consensus target price stands at $14.33.