Last summer, when
was messing with its pricing plans, alienating its customers in the
I spotted a clear opening
, which runs a kiosk-based DVD distribution system.
As I wrote then: "Thanks to Netflix, Coinstar's DVD business will
thrive for even longer than some short sellers had predicted. This
is because it's increasingly apparent that Redbox looks set to take
. Simply put, it's a better deal for customers."
Six months later, Coinstar is now posting stellar results, and its
are up more than 40%. In fact, a just-announced deal with
to enter the streaming video
has led some to conclude that Coinstar's run has only just begun.
Yet a deeper look behind Coinstar's
, along with an unvarnished look at that Verizon deal, implies that
the stock's run is almost done. If you own this stock, then it may
be time to take profits. And for short-sellers, a case may slowly
build in coming quarters.
A good but not great quarter
Shares of Coinstar surged nearly 20% on Tuesday, Feb. 27 on the
heels of a blowout quarter. Sales of $520 million were roughly $20
million ahead of forecasts.
Earnings per share (
of $1 were far ahead of the $0.64 consensus forecast. This will
spike a stock any time. Most of that gain, however, came from
, a reduction in
transaction fees, and a lower-than-expected tax rate.
Make no mistake: The $520 million in sales is the direct result of
rising market share. There are more Redbox kiosks in service (up
17% from a year ago), and each one is seeing higher utilization
rates. So the 33% year-over-year quarterly sales jump, the best
showing in five quarters, shouldn't be discounted.
Yet it's worth noting that the rate of new kiosks put into service
will sharply slow in 2012, simply because the market is getting
close to saturation. So Coinstar will only be able to count on
rising utilization rates for further growth. This explains why
analysts at Needham see sales growth slowing later this year. By
the fourth quarter of 2012, they predict sales will grow just 8%
(to $561 million) compared with the just-completed quarter.
Of greater near-term concern, Coinstar's blowout results were
partially attributed to a heavy slate of new releases. Yet in the
current quarter, there is a big drop off of new releases. And a
current deal with Universal Studios may expire as soon as April.
Universal is ratcheting up prices for new releases, and Coinstar
may simply decline to stock Universal's new releases, according to
Streaming to the rescue?
Frankly, many investors have been predicting the demise of physical
DVDs for quite some time, and they predicted that Coinstar would be
posting shrinking sales by now. They were wrong. But the long-term
migration to downloadable content is inevitable, which is why
Redbox needed to ink this deal with Verizon.
Verizon will own 65% of the joint venture, with Coinstar owning the
rest, with costs shared on a commensurate basis. And oh boy do
these two firms have costs ahead of them. Consider this: Netflix
sends $2 billion a year to movie studios and others to secure the
rights to content. By this math, Coinstar/Verizon will need to
shell out huge sums of money just to build up a storehouse of
licensing agreements that Netflix already has in place.
hasn't disclosed what it spends to secure the rights to stream
various titles, but as a customer, I can tell you Amazon's
selection in its Prime catalogue is very limited. Most movies I'd
like to see are unavailable, although you have theoption of paying
extra for more current titles.
Another thing to consider is YouTube, which is owned by
. The video website offers some titles for $2 or $3 and is already
established. So the Coinstar/Verizon joint venture may find itself
as the fourth horse in a four-horse race.
Coinstar's management anticipates that the development of the
streaming service will create a $19 million drag on profits in the
near-term, with a total potential capital commitment of $157
million. This implies the joint venture will spend a little under
$500 million developing the platform and securing the rights to
content this year. It's simply unclear how costs will be that low
in light of what Netflix must spend for its streaming rights, let
alone the upfront development costs already in place.
Coinstar/Verizon may look to develop a more rudimentary streaming
service that only serves up films that are far beyond the "new
release" time frame when studios charge top dollar. This may
not strike much of a chord with consumers. As analysts at Dougherty
& Co. note, "Without more details on the scope and pricing of
, it is tough to judge whether or not Verizon/Redbox can
effectively compete with Netflix and Amazon in the over-the-top
market." In a worst case scenario, Coinstar pours a lot of money
into the effort, but still badly lags Netflix and Amazon in terms
of market share.
Risks to Consider:
It's best to let the dust settle before looking to potentially
short Coinstar. Shares could extend this week's gains as some
analysts speak of the company's prospects in a very bright
Action to Take -->
Coinstar has done an extremely impressive job of capitalizing on
Netflix's miscues. But Netflix appears to have regained its
footing, as seen by recent robust quarterly subscriber growth.
Moreover, Amazon has announced plans to ramp up its streaming video
efforts sharply in 2012. For that matter, other streaming sites
such as Hulu.com also appear to be building a strong following.
As a result, Coinstar's strong start to 2012 may peter out. That
makes this a good time to start to examine the potential downside
and book profits.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG, VZ in one or more if its "real money"