If renowned author Michael Lewis were to write a book about the financial excesses of the current age, MoviePass might warrant a chapter. To be clear, we present this discussion in order to educate our clients and illustrate our thinking, rather than to advocate any investment in the company.
MoviePass, a movie ticket subscription service, first launched in 2011. The company drew little notice until it changed its subscription terms last year. Incredibly, MoviePass announced that beginning in 2017, subscribers would be allowed one movie ticket per day, every day, for just $9.95 per month. If you possess even a vague idea of what a movie ticket costs, you might wonder how such a deal could be possible, let alone profitable. If so, you wouldn’t be the only one. When the new terms were announced, the New York Times mocked the company, describing it as “the seventy-five cent Dollar Store.” In truth, it was never quite clear what the business plan was. Some saw it as a version of the fitness center model: subscribers join with the best intentions, but for one reason or another, the benefits go mostly unused. The company itself offered only vague hints that one day subscriber data might be sold to marketers or that users could be targeted by ads within the MoviePass app. Perhaps it was just another business planning to use a mountain of cheap and abundant investor cash to build a huge subscriber base and hope for profits later. When faced with doubts about the company’s future, CEO Mitch Lowe frequently touted his credentials as a Netflix co-founder and suggested that the public didn’t understand the economics of subscription-based businesses in general and MoviePass, in particular. When subscriptions quickly grew from about 20,000 to over 3 million, shares of parent company Helios and Matheson Analytics rose to $15 per share earlier this year, and some analysts touted a $20 price target—all in the face of large and growing losses.
It appears there was a misunderstanding, though perhaps not the one Mr. Lowe suggested. Unable to turn lead into gold, the company’s rapid but unprofitable growth eventually caught up with MoviePass. Early in 2018, its cash outflows reached $20 million per month. To stem the bleeding, the company attempted to adjust its subscription terms several times, but when faced with higher prices and fewer tickets, subscribers began to revolt. Investors revolted four months later when the monthly cash burn rate topped $40 million, and the company repeatedly issued new shares to raise cash. Ultimately, shares began to track the company’s operating results, and the stock entered a steep decline. Today, shares trade for about two cents. Last month, New York’s Attorney General announced she had begun a fraud investigation to determine if management had misled investors.
MoviePass offers many lessons for investors, such as the importance of things like profitability, positive cash flow and management credibility. Perhaps the best lesson, though, is that good analysis often starts with a mix of common sense and skepticism.