MoviePass: A Cautionary Tale for Investors

Years from now, business classes may still be dissecting MoviePass' rapid rise and fall.... ------------------------------------------------------------------------------------------------------------------------------------------------------ [View this email in your browser]( Years from now, business classes may still be dissecting MoviePass' rapid rise and fall. But there are plenty of nuggets investors can glean from its collapse here in the present, so that's what we're diving into this week, along with how the development of potential disease cures could radically change biotech investing, stock picks for the long term, and more. – Katie Carrera, Stock Up Editor 4 Valuable Lessons from the MoviePass Debacle --------------------------------------------------------------- Subscription service MoviePass is writhing in the business equivalent of cinematic death throes these days, having experienced a 99.9% stock decline after being unable to outrun its inherent flaws. If you're not familiar, MoviePass, prior to the last few weeks, allowed a moviegoer to attend one screening per day for monthly fee of $9.95. It now allows subscribers to see up to three per month and offers discounts on additional tickets. But the company reimburses theatres for every ticket sold, leaving it on the hook for much more than it brings in from subscriptions and no revenue for its own overhead costs. [Let's take a look at some of the lessons investors can learn from this dubious business model.]( 1. Investing in a speculative, two-stage business is folly. Neither iteration of its subscription model is designed to generate profit. Think about that for a minute: MoviePass' core business isn't supposed to create profit. The business model was based on the assumption that a powerful subscription base would lead to paid deals with movie studios and independent distributors, digital advertising revenue, and sales of data it collected from customers. For the most part, investors would be wise to avoid businesses that expect to lose money only to switch to an alternative plan that will rain profit at an undefined future date. 2. Common sense and five minutes of research can save your investment dollars. Whenever trying to make sense of a company's narrative, take a look at its financial statements. The latest quarterly report from Helios and Matheson Analytics, which owns 92% of MoviePass, showed that despite growing to 3 million subscribers by the end of June, MoviePass had incurred a gross loss of $191 million in the first six months of 2018 before accounting for overhead expenses. That caused the company to burn through $219 million in cash, which resulted in rounds of equity and debt offerings. Common sense tells us that lenders and equity purchases are unlikely to fund a broken business model for long. 3. Make sure cash-burning companies have reliable cash flow. There were warning signs investors could heed to avoid Helios and Matheson long before now. If potential shareholders leafed through the company's filing before the MoviePass acquisition closed in 2017 they would have found a loss of $55 million through the first three quarters of that year. Additionally, the organization showed scant resources on its [balance sheet]( to support any losses from MoviePass, let alone the magnitude of red ink that has been spilled in 2018. 4. Beware self-proclaimed disruptors. The press release announcing Helios and Matheson's acquisition included quotes on how MoviePass was "destined" to disrupt the movie industry. Only a handful of companies can truly upend the economics of a given industry at any point in time. Even in the best investment cases, "disruption" is a hyperbolic buzzword meant to dress up a set of key advantages. It's a much more sound move for investors to buy companies that can exploit inefficiencies in a market, or create value through technology or a competitive edge, than it is to take a chance with organizations seeking to topple long-held practices in entrenched, static industries. --------------------------------------------------------------- Forty-seven percent: That's how many MoviePass customers are considering canceling their subscription, according to a survey by the National Research Group. As the company has tried to stay afloat by making rapid changes have caused customer satisfaction rates to sour — falling to 48% from 83% this spring. --------------------------------------------------------------- The Cost of Cures: How Investing in Biotech Stocks Could Soon Radically Change Biopharmaceutical companies are making more progress than ever before at not just treating diseases but developing cures for them. As exciting as it is for patients and society, it could cause upheaval in the economics of our healthcare system. [For biotech investors, it would require changing how they view stocks of companies that develop cures]( or those that create treatments for conditions that could soon have cures. A short note about cures: There are very few diseases for which cures have been developed, in fact just two: hepatitis C and a rare retinal disease caused by a specific gene mutation. (If you're wondering about diseases like polio and smallpox that ravaged previous generations, those have been largely eradicated thanks to highly effective vaccines but they have not been cured.) Financial impact of cures: Using the hepatitis C cure as a case study, two financial repercussions for investors are immediately clear. First, companies that achieve success with effective treatments for a disease quickly see that success evaporate when a cure reaches the market. Second, companies that develop cures can make enormous revenue right out of the gate, but they too will likely experience significant sales declines following the initial spike. What's happening now: Most of the efforts to develop new cures have focused on rare genetic diseases, thanks to the advancements in gene therapies and [gene editing](. But the biggest upheaval could come if cures are developed for diseases that aren't so rare. For example, Gilead is actively working on developing a cure for HIV but the company faces an interesting dilemma. It is pushing forward with its efforts to find a cure, but it also made $14 billion in 2017 from its HIV treatments and a cure would undermine those sales. What can investors do: In addition to gaining a solid understanding of the competitive dynamics in a specific drug market, and management's strategy for the future — which you should do before buying any biotech or pharmaceutical stock — start researching any companies working on potential cures. Find out how far along they are and what roadblocks they face. Depending on your research, consider buying a position in the stocks of potential competitors that are developing cures. One thing not to do, though, is dismiss the possibility of a potential cure upending an existing drug treatment paradigm or an established company's strategy. [Want to read more? Check out the full article here](. --------------------------------------------------------------- FEATURED PODCAST --------------------------------------------------------------- [Industry Focus]( Tech: Casey at the BAT American big tech stocks have had a pretty good 2018, so why have China's big names struggled? The Motley Fool's investing intern Troy Springer joins to talk about Alibaba, Baidu, and Tencent's woes. [Subscribe on iTunes]( --------------------------------------------------------------- 3 Stocks You Can Safely Hold for a Decade or More If you're looking to build low-stress portfolios that can stand the test of time, only need to be checked periodically, and help counterbalance your emotions (which are the biggest deterrent to investor returns) check out these three businesses. [All have wide economic moats and strong management teams.]( - American Tower ([NYSE:AMT]( The communications infrastructure real estate investment trust (REIT) is one of the world's largest owners of towers and other structures designed to hold telecommunications equipment, which telecom companies rent space on. It's a lucrative arrangement so far, as the company has grown funds from operations (a key bottom-line figure for REITs) by 16% annually over the past decade. American Tower also has two major growth opportunities it can take advantage of: the shift to 5G wireless networks and global growth in wireless communication. - Waste Management ([NYSE:WM]( Start-up costs along with the political and regulatory hurdles mean it's tough for any new contender to enter the trash collection market, which is great for Waste Management. Without a lot of competition and near-geographic monopolies where it operates, the company has quite a bit of pricing power that is critical to its revenue growth. There aren't a lot of significant threats to Waste Management on the horizon over the next decade — it's tough to change human consumption and waste habits — which means the company should be able to crank out decades of earnings. - Cintas ([NASDAQ:CTAS]( Consider this the OG of the "xx-as a service" industry, because Cintas has been leveraging the recurring revenue stream and relatively high margins that come with that business model for close to a century. Uniform rentals are a surprisingly durable business, and Cintas's facilities and distribution networks have allowed it to branch out into offering additional services (think safety, cleaning and security equipment). It's a shareholder-friendly stock too, with robust cash flow management uses for acquisitions, stock buybacks and a growing dividend. --------------------------------------------------------------- Happy Birthday Warren Buffett! The Oracle of Omaha turned 88 on Aug. 30, and [we're reflecting on all of the reasons]( why we love the Babe Ruth of investing. --------------------------------------------------------------- 4 Ways to Avoid Getting Shortchanged on Social Security Millions of seniors rely on Social Security to pay the bills in retirement. Regardless whether you think those benefits will comprise a small portion of your retirement income or the majority, they'll no doubt play a role in shaping your financial picture. [Here are a few steps to take to avoid losing out on that income.]( - Wait until full retirement age to file for benefits. The age at which you initially file for benefits can cause the calculation to shift. By waiting until full retirement age, you'll get the full amount your work history entitles you to. - Make sure your earnings record is correct. Your salary history dictates how much you're entitled to, but if the Social Security Administration has that information wrong you could lose out. Log on to the SSA's website at least once a year to review your history for accuracy and report errors, if necessary. - Put in at least 35 years in the workforce. Your 35 highest years of earnings are taken into account when determining the benefit amount. So, if you didn't work for 35 years, you'll get a $0 factored in for years missing an income. If you have the option to extend your career, doing so could help fill in any gaps. - Fight for raises throughout your career. The more money you make on the job, the more you stand to collect from Social Security. Fighting for higher pay on a regular basis could boost your benefits substantially. --------------------------------------------------------------- Quick Reads - [Berkshire Hathaway's investment in India:]( Warren Buffett may have found an Amazon-like opportunity in Paytm, an India-based fintech start-up. Dig into everything you need to know about the move. - [Playing catch up:]( Lowe's new CEO, Marvin Ellison, is putting a plan in place aimed at closing the gap on the home improvement company's biggest competitor, Home Depot. - [The case for a Roth 401(k):]( This type of retirement savings account has only existed for 12 years. We break down who may be best suited to take advantage of this savings option. --------------------------------------------------------------- TWEET OF THE WEEK --------------------------------------------------------------- [Tweet of the week: Being rich is having money; being wealthy is having time - Margaret Bonnano, science fiction author]( [See all our Tweets]( Join the 1,300,000+ people who follow us! [Twitter]( [Facebook]( We work fervently, feverishly, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. Returns as of August 29, 2018. Our mailing address is: The Motley Fool | 2000 Duke St. | Alexandria, VA 22314 Want to change how you receive these emails? You can [update your preferences]( or [unsubscribe from this list](. This is a promotional message from The Motley Fool Copyright © 1995-2018 The Motley Fool. All rights reserved. [Legal Information.](