Over the last year or so, I noticed something very strange…
No matter how badly the market was getting beat up, a certain tech start-up kept reporting seemingly good news…
First, its user base soared from 150,000 customers to 3 million… then its revenues ballooned to $30 million per month.
But a ticking time bomb was lurking beneath the surface, and it was just a matter of time before it took down the company — and all of its investors.
Today, you’ll discover what happened…
And then you’ll learn how to keep ticking time bombs like these out of your portfolio.
Tick… Tick… Tick… BOOM!
Before I explain what happened, let’s turn back the calendar to October 10, 2017…
That’s when this tech company’s stock reached a 10-year high of $9,715 per share — and that’s when the fuse got lit on the “ticking time bomb” I mentioned earlier.
You see, within 24 hours of the stock peaking, its price dropped by 50% to $5,062…
Within two weeks, it declined by another 50%...
And over the next few months, it fell to just $0.05 per share — that’s just five pennies.
In less than a year, investors lost 99% of their money…
How did a company that was reporting record-breaking results get its butt kicked by the market? And how did investors get caught with their pants down?
Well, it all comes down to one of the 10 Commandments…
Unlimited Entertainment
You might be wondering what the 10 Commandments have to do with investing…
I’ll explain everything shortly — but first, let me tell you more about this tech company…
It’s called MoviePass, and it was founded back in 2011. Here’s how it worked:
For a monthly fee of $30 to $50, customers bought a “pass” that allowed them to see a set number of movies in theaters.
The average movie ticket in the U.S. costs about $9.00. Meaning, at a price point of $30 per month, customers would start saving money after their third movie.
The thing is, the average American moviegoer only goes to the movies once every two months, so consumers didn’t find this an attractive offering. That explains why MoviePass acquired just 150,000 paying customers in six years.
But in 2017, MoviePass was bought by Helios Matheson Analytics (Nasdaq: HMNY), an entertainment company that also owns MovieFone and Oasis Films.
Helios saw MoviePass as a way to gain a foothold in the lucrative movie theatre business, without owning actual theatres. But if its goal was to acquire a huge influx of new customers, it needed a new strategy.
So it decided to change MoviePass’s pricing dramatically:
For just $9.95 per month, customers could see an unlimited number of movies.
More Growth Means More Losses
Initially, this strategy looked like it was working…
In just a few months, MoviePass jumped from 150,000 customers (which, remember, took it six years to acquire), to over 1 million customers.
A few months later, it reached 2 million customers… and a few months after that, it hit 3 million customers.
At $9.95 per month, that added up to nearly $30 million in monthly sales.
Good news, right? Wrong!
You see, MoviePass violated one of the 10 Commandments. And in doing so, it put itself on a path to destruction. Let me explain…
The 10 Commandments
The 10 Commandments I’m referring to have nothing to do with the bible…
I’m talking about the 10 Commandments of Private Market investing — a special report we published in the free Resources section of Crowdability’s website »
These are our 10 rules for making profitable early-stage investments — and because of these rules, we were never tempted to invest in MoviePass.
You see, MoviePass violated a number of our commandments, but none more so than Commandment #8:
“Thou Shalt Determine if the Numbers Smell a Bit Fishy.”
Let me explain…
This commandment states that investors need to look at a company’s business model and financial projections, and then use common sense to determine if the numbers “add up.”
With MoviePass, it was easy to see how its business and its numbers didn’t make sense.
To put it simply, the more “successful” MoviePass became, the faster it would fail:
If customers were paying $9.95 a month and they saw just one movie per month, MoviePass would get close to breaking even. But with the opportunity to go to the movies as often as they liked, people could devastate MoviePass’s bank account:
If they saw two movies a month, MoviePass would lose $10 per customer…
If they saw three movies a month, MoviePass would lose $20 per customer…
And if they saw a movie a week, MoviePass would lose $30 per customer.
This isn’t just a terrible business — it’s a ticking time bomb…
Ticking Time Bomb
As the company’s customer base grew, so did its losses.
At its peak of 3 million customers, MoviePass was losing $20 million per month.
Which explains why its parent company, Helios Matheson, eventually ran out of cash — and why its stock is now sitting at $0.05.
To be clear, you didn’t need to be an expert investor or have an accounting degree to figure out that MoviePass had a flawed business.
By taking a few minutes to look at its numbers, and then applying a little common sense, investors could have avoided catastrophic losses.
So before you make your next tech investment, be sure to review — and follow — the 10 Commandments »
Happy investing.
Best Regards,
Founder
Crowdability.com
