Article written by Ben Rabizadeh
MoviePass has four attractive attributes which serves to nullify most bear arguments.
MoviePass will be worth $10B if they reach 20M subscribers and if given a $500/subscriber valuation.
Bears who only consider the math of the business model as it stands today, either don’t understand what makes a good investment or have ulterior motives.
The most legitimate risk which deserves discussion is that MoviePass trades through a proxy, Helios and Matheson Analytics (HMNY), rather than on it’s own.
There has been much written about MoviePass and it’s launch of it’s $9.95unlimited subscription plan since August 15th, particularly in regards to it’s business and pricing model. The bear thesis has been debated here, here, and most recently here with the discussion surrounding the economics of a $9.95 unlimited plan.
In this article I will present you with four key MoviePass attributes which all-but guarantees it’s success and which renders all debate about pricing and business models completely moot. But before I do that, let’s be clear about why it’s a great folly to try and calculate the profitability of the current business model:
- We don’t have the required data: No matter how much research we do, we will never be privy to the numbers required to make an accurate determination of how the economics of the business are doing today. There are just far too many variables involved and in most cases, bears are making assumptions which cannot be relied upon. This deserves a whole separate article on it’s own.
- Business models change over time: It’s naïve to believe that today’s business model will not change. As the company achieves critical mass and scale, business and pricing models can rapidly change; often without additional significant capital investment. Can you even think of any tech company that isn’t entirely different today than it was at inception? In short, when we invest in MoviePass, we are not betting on today’s business model. In a moment, I’ll tell you what we are betting on.
I have a confession to make. I am a business-owner of a successful dating site, but I never would have gotten involved if I knew the precise math of the business model going into it. Diving too deep into the numbers is what I call “getting lost in the weeds”. Instead, I made an investment decision to purchase this dating site based on:
- The Brand
- The Problem Being Solved (and market size)
- The Management
- The Moat
Over the years, there have been offers made to purchase my company from two different types of investors. Firstly, you have those who appreciate the value of the above four attributes and have a vision for growing the business. These types of potential buyers understand the true value of the company and offer fair prices. Then you have potential buyers who make an offer based on today’s economics alone. They look at your current pricing, revenue and expenses, and try to justify a low-ball offer. These types of investors are just trying to take advantage of you because they want to get a good low price; but they know full well the true value of the company lies in the four attributes listed above. What can we learn from this? Wall street is full of sharks and analysts who will issue bullish and bearish targets based on math alone. But this is just for show and perhaps often involve ulterior motives. Behind the scenes, any serious wall street investor is making their decision based on the four above attributes – particularly the strength and experience of management.
Now, let’s break down how MoviePass does in these four areas.
The Brand: MoviePass
MoviePass is already a national brand as evidenced by the constant non-stop stream of articles, interviews, and other media coverage it garners. It has a cult-following evidenced by the dozens of YouTube testimonials and growing social media footprint; and we can all agree MoviePass is a concise descriptive word with simple yet powerful branding elements which make it suitable for continued scaling. One can discuss other potential competitive brands such as Cinemark’s Movie Club; but such brands can never compete with MoviePass because their services are for their theaters only, so national branding campaigns will be cost-prohibitive for such brands as their product is not available in every geographical part of the country.
The Problem Being Solved: Declining Movie Ticket Sales Some bears will say declining movie sales is a negative. Oh but it’s not. This is what makes MoviePass the perfect business at the right time. There is no better market condition than declining sales for MoviePass. Why? Because once MoviePass reverses sales trends at the big chains, like AMC (AMC), Cinemark (CNK), and Regal (RGC), they will have no choice but to cooperate with MoviePass. Infact, I am quite sure their shareholders will demand it.
Management: Mitch Lowe from Netflix (NFLX) and Redbox
Can it get any better? If we didn’t have CEO, Mitch Lowe, I would have never invested a single penny in this company. Savvy investors know that the #1 criteria in an investment decision is management. Mitch has relevant experience as an executive at Netflix and has proven himself at Redbox. Both of these businesses had pricing models which perplexed bears for years as the companies kept on growing larger and more profitable. In short, Mitch Lowe is an expert in pricing products for the movie consumption industry.
The Moat: A $1B Behemoth
I’ll discuss this more below, but I estimate MoviePass will need to invest $1B to reach 20M subscribers as projected by Credit Suisse. This large investment is actually a good thing. It’s a moat – and a big one at that. What other company will be willing to invest $1B to compete with MoviePass?
So now we have the fundamentals for a great long-term investment. MoviePass has the brand, they are solving the right problem at the right time, they have the right management, and they are building one insurmountable moat. Now let me explain why these attributes trump any bear argument:
“AMC won’t share they said so!” –> refer to “The Problem Being Solved”
“Look, more competition from the theaters themselves!” –> refer to “The Brand” and “The Moat”
“But the math doesn’t add up!” –> so you think with a national brand with 20M subscribers, with shareholders of large chains demanding they cooperate with MoviepPass, with experience and proven management, and with a large moat, that this company cannot figure out how to change the math in their favor? And that’s the crux of the matter. When a company has these four attributes, they can and will change the math in their favor! A manipulator or one not knowledgeable of how true investments are made, will only tell you about today’s math; but they won’t tell you about these big four attributes which is the basis for which big investment bets are made by Wall Street sharks.
Don’t believe me? Let me just give you a quick example of how they can make the math work:
- They can adjust policies (such as no more double-watching movies)
- They can create additional revenue streams (Mitch Lowe just recently announced in this interview $2/ticket revenue from 4 movie studios) such as non-movie related in-app advertising, merchandise sales, restaurant revenue share deals, and they can pit Lyft against Uber for additional incremental revenue.
- They can raise prices at some point if needed
- They can offer other subscription plans for IMAX, 3-D, etc or even a $4.99 one-movie-a-month plan which targets SELDOM movie-goers (this also deserves it’s own article)
It’s important we understand that all of these business model changes and many things which we cannot possibly imagine yet are possible because of the four strong attributes I’ve listed above. Did anyone think Netflix would be a streaming company a few short years after they launched their DVD mailing business? It is therefore a great folly to make a long-term investment decision based on today’s math.
Now a few loose ends we need to cover
Yes, MoviePass may need to raise $1B before reaching profitability, but this isn’t a bad thing! Why? Because they have a strong chance of reaching profitability after this so what that $1B will then represent is the moat, the barrier to entry. No one will want to invest this amount of money to compete with them. So what bears see as dilution, I see as investment. Bring it on. Why $1B? KISS. Keep it simple stupid. MoviePass has indicated the acquisition cost is about the cost of 3 movies before a subscriber will settle into 1 movie a month. To be conservative, we’ll round up the $8.60 national ticket sale to $10, multiply by 3 and add another $10 for overhead and cost of initial debit card. That’s a cost of $40 per subscriber before he breaks even or become profitable. Multiple that by 20 million and we get $800M. To be safe throw in another $200M to round up due to cost of overhead which we surely could be under-estimating. That’s an nice round $1B moat. This is a conservative number. If the rapid flow of deal-making continues, there is a possibility this number may come in much lower.
But didn’t Ted Farnsworth say in this interview, that the company will be break-even in 60 days? Well, yes and no. One needs to realize this 60 day comment was not made in a press release or in an SEC filing; it was made in conversation. That means to properly understand it, we need to understand the context of the comment. Here’s what I saw:
- Ted was insisting on making a point that the company will be “self-sufficient” in 60 days
- The interviewer kept pushing him in a corner and he finally agreed with the interviewer that this meant cash-flow neutral
- Q1 are the “dump months” in the movie industry, AKA slow season
- The company recently collected significant revenue from upfront gift-card sales and annual sales
In short, I believe Ted was trying to say that the company will be “self-sufficient” meaning not requiring outside financing during slow season. They will have cash in the bank from upfront sales, and reduced expenses during slow season in order to be cash-flow neutral. We can see the market absolutely agrees with this assessment because otherwise, the stock would have instantly shot up above $20 and kept it gains. This particular interview was a turning point for the stock in recent days as it was filled with additional juicy nuggets. Infact if you haven’t seen this interview, you should. But make no mistake, the company will need additional financing after slow season is over – or perhaps even before as their rate of growth is accelerating. Also, regarding a cash-flow neutral situation, do not expect to see this in EBITDA because upfront revenue from annual sales are pro-rated and listed under ‘deferred revenue’.
How much will MoviePass be worth?
At 20M subscribers, MoviePass will have enough leverage and enough flexibility to change their business model as they see fit to achieve profitability. Further, they can enter streaming or other business models which have higher margins. Netflix is valued at ~$800/subscriber. At just $500/subscriber, MoviePass will be worth $10B.
But there is just one catch!
We’ve talked about MoviePass but we haven’t talked about Helios and Matheson Analytics, Inc (NASDAQ:HMNY). There are some risks with this namely:
- We are investing through a proxy
- HMNY has it’s own overhead burning cash on RedZoneMap and other activities
- CEO Ted Farnsworth has some unusually high share bonuses based on the success of MoviePass
It would be cleaner and better for investors if we can invest only in MoviePass. This may happen via an IPO or through a reverse merger (in which case I’d like to see the remnants of HMNY operations closed, spun-off, or sold which I actually believe is a distinct possibility as I’m sure Ted is not blind. He knows where the money is and it’s not in RedZone Map). But alas, we can only invest in HMNY for now. That being said, you can do the math on a $10B valuation. Even with a total of $1B worth of dilution, this stock can ultimately head over $100 (or maybe just $12 if we get very bad terms on future financings).
There is much more to come which can’t be covered in this one article but I can tell you something else. Over the last few months, I’ve developed a method based on publicly available information which accurately projects the MoviePass subscriber count before the company makes their milestones public. Those who follow me on Stocktwits know that with a seemingly uncanny ability, I was able to forecast almost to the day when the company hit 600K, 1M, and 1.5M subscribers. It’s a simple matter to make this prediction yourself. All it requires is an excel sheet, a careful look at SEC filings, and a careful look at other public data. Things change daily, but based on the popularity of their product as of today, they are on track to reach 2M subscribers by the first week of February. This is not an official forecast and the date will change as we get closer but stay tuned. Infact, these data also show a possibility of reaching 5M subscribers by August and 10M subscribers by the end of the year. It’s too early to know for sure but the data is leaning in that direction.
So in summary, it’s a folly to calculate the economics of the MoviePass business model as it stands today. People who tell you this just do not understand what makes a good long-term investment or perhaps they have an ulterior motive. Long investors should have peace of mind that with four strong attributes in our back pocket, the only metric we need to worry about now is subscriber growth. With subscriber growth comes leverage, and a whole wealth of opportunities for monetization.
Credit: Joshua Kim and Ben Rabizadeh