Hollywood Media Has A Favorable Risk Reward

| About: Hollywood Media (HOLL)

Summary

Online movie tickets industry is on fire.

Hollywood media is trading for less than cash.

MovieTickets.com will be sold.

The online movie tickets industry is on fire. This is a new trend that is well underway but Wall Street is not paying attention. Consequently, if MovieTickets.com was a public company, its stock price would be soaring. But because the company is owned privately and 36 percent by Hollywood Media, no one cares. Actually, Hollywood Media trades for less than cash in the bank even though MovieTickets.com's value increases on a daily basis.

Company Description

Hollywood Media used to be a company with several different businesses. Because of inability to generate profits, shareholders wanted the company to liquidate. Consequently, the company was selling one business after another. The last business left is 36 percent ownership of MovieTickets.com, seller of movie tickets online. In order to understand the new investment thesis, you need to know the history of online ticket sales.

Online Movie Tickets Industry

For 15 years online movie tickets industry has been dominated by two companies: Fandango and MovieTickets.com. Both of these companies were founded in 2000 by theatre chains. In case of MovieTickets.com, Hollywood Media was one of the founders and this is how the company still owns an ownership interest in it.

The way that it worked was that theaters provided their online ticket inventory on an exclusive basis to Fandango or MovieTickets.com. They had to choose one over the other. The two players battled with each other for a dominant position as to who was going to accumulate the majority of theatre screens.

These companies were making money in two ways: 1) Convenience fee or surcharge, 2) Advertising. People who bought tickets online had to pay a $1 surcharge which was split 50/50 between the selling company (Fandango or MovieTickets.com) and the theater. Advertising revenue was generated from movie producers who wanted to place their trailers on their websites.

By 2009, Fandando was in the lead with 60 percent market share while MovieTickets.com had 40 percent. In 2012, MovieTickets.com was hurt by AMC, one of the founding members, who switched from MovieTickets.com to Fandango. Consequently, Fandango had approximately 70 percent market share.

If you step back and think about the whole structure of the industry, you realize that it does not make any sense. Put yourself in the shoes of the theatres. They have to exclusively sell tickets either through Fandango or MovieTickets.com. How stupid is that? Wouldn't it be better to sell online tickets through as many channels as possible? Look at the airline industry. You can buy airline tickets on many different websites.

At some point, the movie theaters became dissatisfied with the status quo. This resulted in various lawsuits for power. MovieTickets.com and AMC were involved in a long lasting lawsuit.

Movie theaters wanted to have the control over the sales channels. So one-by-one, they started to end the exclusive relationship and began doing business with both companies. For example, in May 2013, Carmike, founding member of Fandango, signed up with MovieTickets.com in addition to staying with Fandango. AMC did the same thing, but it also set up its own website. Most recently, in March 2015, Regal Entertainment Group, which is also one of the founding members of Fandango, opened up its online ticketing inventory to MovieTickets.com.

These theaters are transforming the industry from the exclusive to non-exclusive online ticketing partnerships. They are doing it because it makes sense but also they want to capitalize on a huge growth opportunity.

In 2012, 2013, 2014, online ticket sales represented 4 percent, 10 percent, and 13 percent of total sales, respectively. Think about it for a second. Everybody has a smart phone and we are still buying 87 percent of movie tickets at the box office. This is extremely inefficient for us and for them. We have to stand in line and they have to pay someone $10 per hour to sell us the ticket.

This is already changing and it is going to change more. I have no doubt about it. I believe that in ten years, it will be the other way around - 85 percent of tickets will be sold online and only 15 percent will be sold at the box office. There will only be one person working at the box office servicing people who refuse to buy online. Both Fandango and MovieTickets.com are making it easier and easier to buy online. They even developed apps with bar codes.

This is where the industry is going and you can benefit from it before everybody else wakes up to this.

Here is how to make money from this trend.

Investment Thesis

Hollywood Media owns 36 percent of MovieTickets.com. The company has a market cap of $15 million. It appears that there was a recent seller which crushed the stock price which did not recover fully yet. Because the company desisted from an exchange to save money, the stock is trading on OTC Markets. Consequently, when current holders want to sell, they immediately crush the stock price no matter what the value is. This is exactly what happened in January during the general market sell-off. The stock price went from $0.70 to $0.40 within a short period of time. I believe I know who the seller was.

In May 2014, BlueCrest Capital Management published 13-G where it disclosed a large stake in Hollywood Media.

According to the release, BlueCrest bought 2.9 million shares which represented 12.6 percent of the company.

In December 2015, Forbes ran an article, "Billionaire Michael Platt Closes his BlueCrest Hedge Fund."

"Platt's BlueCrest Capital Management announced on Tuesday that it would be returning the $7 billion it manages for outside investors and become a private partnership that essentially manages Platt's money together with funds belonging to other BlueCrest partners and employees.

Platt's move to shut down his hedge fund comes amid turbulent times in the hedge fund industry that has in general been producing disappointing returns and is under pressure to cut fees from investors. In a statement, BlueCrest said that 'ongoing secular changes in the industry, including trends in fee levels, the cost of hiring the best trading talent, and the challenges in tailoring investment products to meet the individual needs of a large number of investors, have weighed on hedge fund profitability.'"

As of December 31, 2013, Hollywood Media had $23 million in cash according to a press release.

There were no further updates because the company delisted and stopped providing updated financial statements. I don't know how much cash the company still has but I estimate that it has more cash than the current market cap.

The hard part about valuing MovieTickets.com is that we have no idea how much it makes because it is a private company and Hollywood Media does not provide updates anymore. With that being said, here is what we do know.

Click to enlarge

This is a partial income statement of MovieTickets.com. In 2008 and 2009, it generated $18 million in revenues and $6 million in EBITDA. Then, because of the battle with AMC, it became unprofitable. But this was before everything in the industry changed. This was still when the two companies operated with exclusive agreements.

Right now, MovieTickets.com sells tickets to more screens than Fandango. It has 29,000 screens while Fandango only has 25,000 screens. Nationally, there are only 39,000 screens.

MovieTickets.com is doing wonderful right now. Go to MovieTickets.com under press releases and look yourself. The company keeps growing. Also, do some scuttlebutt and call MovieTickets yourself and you will learn just how busy they are. If MovieTickets was public, its stocks would be soaring.

The company is growing fast while nobody is paying attention. Hollywood Media's shareholders assign MovieTickets.com negative value.

While MovieTickets.com is in the lead when it comes to number of screens over Fandango, it is most likely behind in sales. Because of the transformation of the industry, the number of screens is not that important because very soon both companies will be able to sell for any theater. What will matter is the market share and how this market share will change as more competitors enter the field.

Right now, there are about 1.3 billion movie tickets sold annually. You already know that about 13 percent of them are sold online. This means that 169 million tickets are sold online. Because each ticket has $1 surcharge this translates into $169 million in revenues. As mentioned before this $1 is split 50/50.

I think that MovieTickets.com has a market share of between 20 and 30 percent. If this is the case, MovieTickets.com might generate between $17 and $25 million in ticket revenues.

Don't forget that MovieTickets.com also generates advertising revenues which could add another $5 to $10 million. But I don't want to bother with it here. So let me ignore it for now.

If I am right and the company does generate this much in revenue, then the bottom line could be anywhere between $2 and $6 million. That's pretty good considering you are not paying for it.

Some people will say, "30 percent market share is nice but it is unsustainable because more competition will follow." I agree 100 percent. The exclusivity is the thing of the past. Very soon, there will be bloggers selling online tickets. With that being said, even though there will be more players, there will be a few that will hold the biggest market share. Fandango and MovieTickets.com will likely stay dominant. Yes, they will no longer have such big market shares but they will be dominant.

However, within a few years, online sales will probably constitute 30 percent of total sales which means that 390 million tickets will be sold online. This is plenty to divide among all the current and future competitors in the space. Even a 15 percent market share for MovieTickets.com will mean more revenue than what it could be generating today.

Then, when you add another $10 million of advertising revenue, MovieTickets.com could be generating $40 million in revenues and $10 million of bottom line. A multiple of 15 would give you a value of $150 million and would be totally justifiable because the entire industry would still have lots of growth left. From 30 percent, it could grow to 40 percent, 50 percent, or 80 percent. You pick the number.

At $150 million, Hollywood Media's portion would be worth $54 million. This would translate into a stock price of $2.45 per share.

The problem is that the company is in the process of liquidating MovieTickets.com right now. Investors are selling the shares because they are tired of waiting. But for long term shareholders, it is probably better if the sale does not happen for another year or two. MovieTickets.com will be worth a lot more if the liquidation gets delayed. Right now, MovieTickets.com might only be worth between $40 and $80 million ($14 and $29 million for 36 percent). Either way, at this stock price, you are not paying a penny for it thanks to impatient sellers.

Recent industry M&A acquisitions clearly show that the online theater ticket industry is hot and major players are moving into this space.

On January 31, 2016, Disney, Fox and Lionsgate announced that they are teaming up to invest $50 million in the Atom Tickets mobile ticketing app. Think about this for a second. They are spending $50 million in a start-up that may or may not succeed while MovieTickets.com is already successful with thousands of movie screens on exclusive contracts.

On February 17, 2016, Fandango announced that it is buying Flixster along with Rotten Tomatoes in an equity deal. Flixster is a social media site for discovering new movies. It is a perfect combination because Flixter has more than 20 million unique visitors per month but until now this audience had no way of buying theater tickets online.

I have never been more convinced that MovieTickets.com will be acquired. There are rumors circulating that the deal was in the works but if fell apart. In my opinion, the reason why it fell apart was that the buyer and seller could not agree on the price. The seller, which is HOLL and other partners, know that the industry is hot and MovieTickets.com is very valuable. It will be sold. The only question is price. But at this price level, it doesn't matter because you are getting Hollywood Media for less than cash in the bank which mean MovieTickets.com is thrown in for free.

While the risk/reward is favorable, there is a potential risk that the management is never able to sell MovieTickets.com, burns through all the cash, and the company goes under. This is unlikely but still a possibility. I think the biggest risk is liquidity. The sellers simply cannot find buyers when they want to sell so the stock price can collapse anytime for no fundamental reason.

Disclosure: I am/we are long HOLL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.