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Verizon Communications Inc. (VZ), Netflix, Inc. (NFLX) & 5 Reasons to Sell Coinstar, Inc. (CSTR)

Specialty retailer and kiosk operator, Coinstar, Inc. (NASDAQ:CSTR) seems to be growing despite a lot of naysayers. The company showed healthy increases in its top line and bottom line, and has manageable debt levels. The company has a sizable repurchase program in place. Yet, the company is a heavily shorted one with close to half of its outstanding float being sold short. However, before buying into the Coinstar, Inc. (NASDAQ:CSTR) story, investors should carefully evaluate some of the reasons why the short-sellers might be right.

Coinstar, Inc. (NASDAQ:CSTR)

1. Trend towards “over the top”

Consumers are increasingly turning towards online media consumption, and shying away from physical DVDs for watching movies and other video content. However, Coinstar, Inc. (NASDAQ:CSTR) has diversified its product offerings in the kiosks by offering Blu-ray discs as well as video games.  And also, the company’s partnership with Verizon Communications Inc. (NYSE:VZ) for launching Redbox Instant, is a step in the right direction.

But the Internet streaming business is turning out to be extremely competitive, with some companies spending billions on acquiring new content, and getting subscribers. The category leader in the online streaming space, Netflix, Inc. (NASDAQ:NFLX), as well as other leading competitors like Amazon.com, Inc. (NASDAQ:AMZN) and Hulu have gained strong traction in adding new subscribers. Netflix, Inc. (NASDAQ:NFLX) now has more than 33 million unique subscribers, and has a massive content library of more than 60,000 titles. Also, almost all the leading companies in the space are heavily investing in adding original shows to their library.

Redbox Instant by Verizon Communications Inc. (NYSE:VZ) has a small library of roughly 4600 titles, and will not be adding original shows in the near term either, but will be providing 4 redeemable DVDs at kiosks. As a result, the joint venture between Verizon Communications Inc. (NYSE:VZ) and Coinstar, Inc. (NASDAQ:CSTR), will have a difficult time gaining widespread consumer acceptance. However, Verizon Communications Inc. (NYSE:VZ) has a strong presence in the video-on-demand space, and might be able to aid in bagging a decent amount of subscribers. But over time, competition is expected to intensify even more in the Internet TV space.

2. Content from movie studios

Coinstar, Inc. (NASDAQ:CSTR) gets its content from many movie studios and video game publishers. The company has entered into licenses with some studios to acquire DVDs by the “street date” i.e. on first date, on which movie studios release their DVDs for at home entertainment for rentals or sales. And also other arrangements with other studios will enable the company to receive DVDs for rent after 28 or more days after the DVD gets released.

As users of Redbox often frequent the kiosks for getting new release movies at a reasonable price, delayed content from movie studios will impact its reputation as well as revenues negatively.

3. Dependency on retailer locations

Coinstar, Inc. (NASDAQ:CSTR) depends upon a number of retailer locations for the placement of their kiosks. Some of the major retail chains including the likes of Wal-Mart, Walgreens, and Kroger all generate substantial amounts of revenue for Coinstar through kiosk placements. These retail chains all operate large stores, but can still terminate current arrangements for better utilization of their retail footage in stores. This can materialize if Redbox and Coin kiosks fail to generate substantial amounts of revenue.

With a material amount of competition in both the DVD business as well as the Coin counting business, the termination of these retail relationships can have a strong negative impact on the company’s operating results.

4. Losses from newer business segments

The company’s management is very keen to enter into new business segments, and experiments with newer concepts and testing prototypes. This is actually a good thing, and deserves praise as well. However, entering highly competitive new retail concepts has been leading to losses for the company’s New Ventures segment.

It is now expanding into testing concepts like Rubi Coffee kiosks, ticket sales on Redbox kiosks, as well as the big bet on Redbox Instant by Verizon Communications Inc. (NYSE:VZ). While some of these concepts can be home-runs for the company in the future, the losses from the segment have increased in each of the last 3 years.

5. Coin business faces incremental competition

The company’s coin conversion business faces a lot of competition. It grew segment revenue last year, but primarily due to the increased number of new kiosks in place. However, the key measure for retail stores, the same-store sales stayed flat on a year-over-year basis. The company’s calculation of same-store sales is a little different from other retail companies, as it counts 13 months, as opposed to the industry standard of 12 months.

And this segment is facing a lot of incremental competition as many banks and even some big retailers often offer their own coin-counting service by acquiring the necessary equipment. A reason for this increased competition might be the almost 10% transaction fee the company charges for the coin service. As a result, the competitive scenario for this business line might worsen.

The takeaway

While there are some small negatives in Coinstar’s business, the company is growing its overall revenue as well as its bottom line. And also it has a number of newer initiatives, some of which might gain solid traction in acquiring new customers, especially the Redbox Instant venture. However, the company also has a share repurchase program as well, and a pretty solid balance sheet. As a result, there might be some upside for the stock as well.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix.

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