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MoviePass: The unicorn that jumped into Wall Street too soon

MoviePass, a U.S. movie ticket subscription service owned by data company Helios and Matheson Analytics, offers a cautionary tale of the dangers of a disruptive company caught too soon in the unforgiving glare of the public markets.

Investors loved it when Helios and Matheson bought a majority stake in MoviePass, led by former Netflix vice president Mitch Lowe, for $27 million in August last year.

At the same time it slashed its variable fees to a flat $9.95 that entitled subscribers to watch up to a movie a day for a month, and people thronged. But investors soon began fretting that the company was burning too much cash to subsidize moviegoers trips to the cinema.

Sure enough, in April Helios and Matheson warned in its annual report that its independent auditors had “substantial doubt” about its ability to continue as a going concern and this may hinder its capacity to get financing. On May 8, it said it had only $15.5 million in cash left. Its shares plunged, and are down more than 90 percent for the year to date.

Helios and Matheson’s greatest mistake, analysts and fund managers say, was trying to bring the company into the public markets before it was ready.

In fact, they say, MoviePass is not far removed from the success of other disruptive technology companies such as Uber Technologies and Airbnb that have been valued at more than $1 billion – the so-called unicorns, start-up companies valued at more than $1 billion

“The transparency is killing them. You don’t hear about how much money Uber loses every time you get in one of their cars, you hear about how fast it’s growing. What we’re looking at now is one of the best examples of why you don’t go public” in the early stages of a technology company’s growth, said Kevin Landis, a longtime tech portfolio manager at FirstHand Funds.

Over the last 12 months, MoviePass’s subscriber numbers have grown from around 20,000 to close to 3 million. That will swell to more than 5 million by the end of this year, the company projected in March.

The two analysts tracked by Thomson Reuters who follow Helios and Matheson both have a buy rating on its shares and a target price of $12, implying that it has an enterprise value of $1.2 billion. Instead, its market capitalization is just $37 million, and its stock trades at close to 70 cents a share.

Helios and Matheson Chief Executive Ted Farnsworth, who transformed the company to focus almost exclusively on MoviePass, told Reuters that he does not regret bringing MoviePass into the public markets, rather than trying to grow it with venture-capital investments like other unicorns.

“One thing that Wall Street offers you is more freedom,” he said.

He believes that it will be cash-flow positive by the end of this year as it continues to attract more subscribers, allowing it to charge movie studios higher fees to promote specific films. It also has more than $300 million in cash available from an equity line of credit.

“I don’t worry about the capital at all,” he said.

But analysts say that public market investors are not willing to support the years of unprofitability that some so-called unicorns depend on. Uber, for instance, posted a loss of $1.1 billion in its fourth quarter, sources have told Reuters, while short-term rental booking site AirBnB reportedly posted its first full-year of profitability in 2017.

“The growth-at-all-costs strategy is being funded these days by the venture community, not the public market. The last time we saw the public markets fund a growth-at-all-costs strategy was the 1999 internet bubble, and we all know how that ended,” said Kathleen Smith, principal at Renaissance Capital and portfolio manager of the company’s $18.8 million IPO ETF.

The prospect of steep declines in a company’s valuations once it hits the public markets is one reason why U.S. companies are waiting longer to go public.

Overall, U.S. companies that have gone public this year have done so at an average market capitalization of $1.1 billion, according to Thomson Reuters data, a 44 percent increase from the average market cap during the height of the dot com craze in 1999. At the same time, companies are now going public 6.5 years after receiving their first venture capital backing on average, more than double the three years between initial funding and going public in 1999.

On March 23, cloud-storage company Dropbox saw its market value top $12 billion on its first day of trading. The company’s Series A funding round was in 2008, when the company was valued at $25 million.

Helios and Matheson, meanwhile, may end up selling MoviePass or being acquired, said Nehal Chokshi, an analyst at New York-based Maxim Group. The value of the company’s brand name alone is most likely worth more than its market cap, he said, citing Comcast‘s reported $192 million purchase price for movie-ticket seller Fandango in 2007.

Farnsworth, for his part, said he has been approached by “all the major companies you think of” for an acquisition but has turned them down.

“We are so far ahead of other people who were out there who paved the road like Spotify, who burned billions of dollars a year, and we’re not even close to that,” Farnsworth said.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

Source: Tech CNBC
MoviePass: The unicorn that jumped into Wall Street too soon

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