Catching a moonshot with Helios and Matheson

Every once in a while I get one right at just the right time. It doesn’t happen often, but it certainly is nice when it does.  Such has been the case with Helios and Matheson.

I owe this idea to Mark Gomes.  His article led me to the story.

Before I start this post, let me just say I am pained to write about a stock that has gone up so much.  I don’t intend this to be an endorsement of the stock at this level, particularly in the short run, as it could as easily drop as rise 10% or more today (I see the stock is down almost 15% in pre-market on this news, which doesn’t seem all that bearish to me at first glance).  Nevertheless my thought process in this particular case is worth recording and that is what the intent of this blog really is, so here it goes.

I’m not going to step through the story in this post.  There are plenty of other places where that has already been done, both in Mark’s article and this one here.  There is also a good two part series interview with the CEO of MoviePass on the Forbes website (part 1 and part 2).

After learning about the story, I spent all of Monday delving into it.  With some trepidation I bought stock in the $3.50’s and then watched the price rise and then fall back to below where I bought it at the end of the day.

On Monday evening I spent a significant amount of time deliberating about my position.  There were at least a couple of times where I was on the verge of selling my shares first thing Tuesday morning.

Why such anxiety?  Because it is not an easy story to accept at face value.  The business model, essentially selling unlimited monthly passes for movie tickets (the only limit being one purchase a day) is, at least on the surface, a wildly unprofitable proposition.  Every time a customer goes to a second movie, MoviePass loses money on that sub.

This is why, and not without good reason, the company is derided on twitter by most of those with a serious take.  Its very easy to conclude that MoviePass is destined for bankruptcy.  I made a single tweet about the company today (I was afraid if I made more my inbox would see a deluge of nastiness) and the first response I got was ‘it’s called a Ponzi scheme’.

I don’t believe that a Ponzi scheme is quite the right parallel even if things do go awry, but I admit I have no crystal ball to say that all will end well with MoviePass.  Nevertheless I held more than half of my shares today, even as the stock rose some 60% (I admit I did sell some shares, you just have to after that kind of day).

But why did I hold most of what I owned?  Well some of it was momentum, the low float, the past fluctuations in the stock (it rose to $17 last summer, albeit with a much lower share count), but those reasons alone aren’t enough.  There are always circumstantial reasons to stick around.   What gave me the conviction to stick to the stock, to not sell at the open, or when it was up 10% or 20% on the day, was a shift in how I started to think about the stock on Monday night.

Those with harsh criticism of MoviePass are thinking of it as an established business.  It can’t be profitable right now; they are paying full price for tickets and every additional theater goer adds losses to the bottom  line.  The losses are going to accumulate and the company is destined for bankruptcy.  That is the chorus.  That is also how I was thinking about the stock when I was ready to cash out Monday evening.

But what if we start thinking about MoviePass like a start-up.  An early stage start-up doesn’t worry about monetizing.  They worry about disruption, growth and capturing market.  I’m no VC, and maybe this is just me being naive, but it seems like the thesis with many start-ups is that by the time they are ready to monetize, they expect to be big enough that options will present themselves that are not identifiable just yet.  And sometimes that logic is correct.

MoviePass has went from 16,000 subscribers to 400,000 subscribers in a month.  It is undoubtedly going to be much higher in another month.  While I don’t know exactly how they can monetize their subscriber base, I do think that their options (and leverage) increases as their base grows.  Maybe they will be able to leverage their size against the bigger chains.  Maybe the early adopting chains will show such growth that the larger chains will relent.  Maybe ancillary revenues at theaters will increase to a point where it’s a win/win for all.  Maybe they can leverage their data analytics, identifying preferences of card holders and promoting features based on those tastes.

To take a “for instance”, long before I was introduced to Helios and Matheson or MoviePass I read a piece that talked about how important concessions were to the theater business.  The article explained how much money movie theaters made from concessions.  Prices are high and margins are big.  A big part of the business model depends on filling as many seats as possible.  Yet theaters are often far from full.  MoviePass is tailor made to address this problem.  MoviePass is monetizing otherwise empty seats in a way at least somewhat analogous to how the original model for Airbnb monetized empty beds, or how Uber monetized empty cars.

I think its worth noting that there was a NY Post article this morning saying that while AMC has expressed hostility towards the MoviePass model (as they are reeling after being just about to launch their own subscription package), “Regal and Cinemark have taken a wait-and-see approach to the $10 plan.”

Helios and Matheson paid $27 million for a 51% ownership in MoviePass back in mid August.  There is a clause in the agreement they signed with MoviePass that preserves their 51% ownership, even in the event of further issuance of shares.  As I mentioned, at the time of the transaction MoviePass had 16,000 subscribers.  So Helios and Matheson paid $2,500 per subscriber.

Is that valuation realistic?  If it is, then you can do the math on 400,000 subscribers.  If its not, and it seems a little steep to me, then what should a subscriber be worth?  I guess if you think the company will do nothing but lose money then its an easy answer and that number is pretty much $0.  But if you think they are going to be able to monetize their base, then it’s a worthwhile question.

After the run up to a little under $6, Helios and Matheson has a market capitalization of about $75 million including the dilution of the convertible notes and warrants they offered as funding for the MoviePass transaction.

At that price, the current subscriber base, which again increased about a bazillion percent in the last month, is being valued at $375 per subscriber.  If (when!) MoviePass doubles that subscriber base, its $185 per subscriber.  The company thinks they can get to 2 million subscribers. If that happens then we are at less than $75.

Those numbers do not seem out of line to me.  Particularly when the options available for monetization are likely increasing as this base grows.

I know I am going to get a lot of feedback on this post.  And I am going to be told how stupid my reasoning is.  So let me remind the reader that one of the tenants that I try to keep is to hold both sides of the argument in my head at all times, and not to commit to either side fully.  This is never more the case then it is here.  I see both sides.  I understand that the optimistic view of MoviePass might be wrong.  And I’m willing to change my perspective.  If I didn’t own the stock already I would be pained to buy it here, but that is mostly a factor of knowing my own psychology and that I would be whipsawed out on a correction.  However already holding the stock, I am willing to give it some rope as I do see a path.  Maybe its blurry but its there, and the market is telling me that path is being cleared.  So I will stick with it for now.