It can often pay to buy in bulk. What may cost a lot of money for one unit might scale nicely. That’s true for both consumers and producers alike.
Right now, two companies are making big headlines for losing money on each sale — but plan to make up for it on the volume. And just like the old joke, the notion that simply pumping up the volume will create different results is a challenging one.
The first is a well-known name: Tesla Motors (TSLA). The company just reported earnings after the market close on Wednesday. And while production numbers are up, the company also set a record for how much cash it’s burning. The car company, with a market cap bigger than the profitable General Motors, is losing $8 million per day with no end in sight.
Shareholders didn’t mind that pesky little financial detail, however. The company hitting production numbers was enough to send shares about 10 percent higher on Thursday.
But the real poster child for a flawed business model comes from a company called Helios and Matheson Analytics (HMNY). They’re the company behind MoviePass, a product you may have heard of.
Buying movie tickets from theaters at a slight discount, MoviePass sells monthly subscriptions. It’s a good deal for moviegoers, as they come out ahead with as few as two movies per month at the $9.99 subscription rate the company had. And it’s been great for movie theaters, who are seeing rising concession sales, a high-margin item.
But MoviePass is a losing proposition for Helios and Matheson in just about every circumstance. They’re not partnering with theater chains or getting a big enough discount. They get money up front for a subscription, but have been bleeding out the end. And despite a 250-for-1 reverse split, shares are down over 99 percent from their peak in the past year. As of yesterday, you could have bought all the shares outstanding for $245,000 — less than the price of a median family home in America.
So assuming the company didn’t declare bankruptcy between the time I wrote this blog and the time it posted, it’s clear that a business model that relies on never making money is a flawed one.
But the business world is full of better thought out plans that have also ended up failing spectacularly. Tesla might not be making money on its cars now, but with a high enough production level, it at least could. MoviePass was structured to be such a good deal for consumers it would attract interest, but it was never designed to bring in enough cash up front to keep the operation going.
Tesla will likely continue to move along, at least for now. The company has some big debts due early next year, and how they perform in the second half of the year will be worthy of closer attention. As for MoviePass holders, there are other opportunities. Many theater chains have started their own rewards program that offers discounts for those who need their silver screen fix more than once a month.
At the end of the day, what a company does matters. But it’s also important to consider how a company plans to make its money from what it does. That’s the difference between a thriving company, a struggling company, and a company likely headed for bankruptcy.
Many industries do make more sense with a large customer base and a large number of sales. The automotive industry is definitely one of them—and high-end electric cars may not make the cut as a standalone firm. Not every company can rely on simply increasing volume and hoping the customers will be there. And that’s a dubious proposition when you don’t have the ability to make a decent cash flow, much less a profit, on each trade.
We’re at a point in the bull market where numerous questionable investment opportunities like this abound.
Consider what you own, why you own it, and how each company behind your shares is capable of weathering a slowdown or a recession. It might not happen today or next week, but a company struggling now when the overall economic outlook is rosy will be in far more dire straits when the sun stops shining and the rain starts.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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