Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Outerwall Inc (OUTR): Don’t Write Off Redbox Just Yet

To hear most analysts tell it, Redbox has become a zombie for its owner Outerwall Inc (NASDAQ:OUTR), the former Coinstar movie rental and coin-counting machine maker. It’s dead but it just doesn’t know it. Let me be the one to misquote Mark Twain and say that reports of its death are greatly exaggerated.

Outerwall Inc (NASDAQ:OUTR)On the surface, the Wall Street diagnosis looks correct. While total revenues came in 4% higher for the quarter, they broadly missed analyst expectations and comps on its Redbox machines tumbled 7% from the year-ago period. Even with what might be considered a bright spot for the quarter, that it surpassed Netflix, Inc. (NASDAQ:NFLX) in market share and now owns more than 50% of the entire DVD rental market, can be cast in a different light as its rival has been focusing more attention on its streaming business and, with the demise of Blockbuster, it better be the dominant disc rental player.

But I think there are some key components that are missing here. In the latest quarter, it had 43,600 Redbox kiosks in service, while last year it had 38,500, or 13% less. I know that within a mile or two of my house, I have a choice of at least a dozen Redbox machines. While it wasn’t mentioned during the call, I’ll wager a lot of the degradation in same-machine sales was a result of Outerwall Inc (NASDAQ:OUTR) cannibalizing sales. It generated $11,900 per machine in the second quarter of 2012 but just $11,000 per machine this time around even as segment revenues rose 4% (though it expects to reverse that trend in the back half of 2013).

Yes, the DVD market is dying, but what we’re hearing now might not be its death rattle, particularly because of the seemingly surprising strength Outerwall Inc (NASDAQ:OUTR) got out of its Blu-ray offerings, which, combined with the game titles available, saw 69% growth this past period.

It’s true an investment Redbox does need to account for the fact that 86% of Outerwall Inc (NASDAQ:OUTR)’s total revenues come from the kiosk so any fluctuation in that business will impact performance, but it’s not standing still either, introducing more of its self-serve Rubi coffee machines, introducing “green” ecoATM’s, and launching its mobile tech kiosks that allow consumers to buy mobile phones, tablet computers, and mp3 players. Nor is it sticking to its guns with DVDs as the joint venture with Verizon Communications Inc. (NYSE:VZ) for a streaming service continues to be developed.

While we might be getting our entertainment from more sources these days, the DVD player is still a place where viewers are checking out Hollywood’s best, which might be more of a problem than kiosk cannibalism.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.