What's happening?

The shares of one of this fall's hottest stocks, Helios and Matheson Analytics Inc (NASDAQ:HMNY), are currently down about 15% as of 12 p.m. EDT.

In an 8-K filing with the Securities and Exchange Commission on Wednesday, the company explained that it entered into an option agreement to purchase up to 8.7% of MoviePass stock, on top of the 53.71% of the company it already owns or will acquire through the conversion of a MoviePass note.

So what

Helios and Matheson Analytics grabbed national attention when it announced a deal to acquire majority ownership of MoviePass in August. MoviePass is a service in which moviegoers pay a flat monthly fee to see an unlimited number of movies at theaters across the United States.

Previously a niche service for the most engaged moviegoers, MoviePass subscriptions exploded 2,300% in just six weeks to 400,000 subscribers after the service announced it would decrease the price on its unlimited plan from $50 per month to $9.95 per month.

Photo of rising stock chart now declining

Image source: Getty Images.

At that price, MoviePass subscribers stand to save money with their memberships, even if they see just two movies per month, based on the national average ticket price of $8.65. In urban areas where ticket prices are higher, MoviePass members can save by using the service for just one ticket per month.

For now, MoviePass is eating the loss from its most active members. The company doesn't have special arrangements to purchase tickets at reduced prices, something it may be able to achieve after accumulating a sufficient number of members to give it negotiating power with cinemas.

MoviePass membership cards are prepaid debit cards that the company loads with cash value when customers use their online account to plan a trip to the movies, and thus MoviePass is paying full price for the tickets its subscribers request through their accounts online.

Now what

Helios and Matheson Analytics Inc believes the data it gleans from its users will help it generate additional revenue on top of the membership fees earned by the MoviePass service. In theory, knowing which demographics are most likely to see a movie has some value for studios and other content producers.

For now, though, shares of the company are simply flying high based on what it could be, rather than what it is. Given the inherent adverse selection bias of any membership-based service -- people who visit the movies most are most likely to sign up for a flat-rate plan -- MoviePass is likely burning cash to satisfy its obligations to its members.

Highly speculative by its nature, Helios and Matheson Analytics is almost certain to appear on the list of stocks with the largest percentage gains and losses on any given day. After rising in value more than 10 times over in the past month, it's not surprising to see shares give up a little of their gains as early investors lock in their profits.  

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.