Coinstar is kicking Netflix's buttJune 15, 2012: 12:18 PM ET
Shares of Netflix (NFLX) got off to a smoking start this year after a nightmarish 2011. But like the rest of the market (and especially momentum stocks), Netflix has come crashing back to Earth. The stock is now actually down almost 10% in 2012. Do investors think that the video market is dead?
Take a look at Coinstar (CSTR). The owner of the bargain DVD rental kiosk service Redbox is having a banner year. Shares are up nearly 40%. What gives? Well, I think one reason is that Coinstar, which also operates its namesake coin counting machines in mass market retailers, may be benefiting from the weakness in the economy.
A monthly subscription for Netflix could be the type of thing you cut if you're worried about job stability, Europe's financial woes and stock market volatility. But the occasional "splurge" on a movie for $1.20? That's still doable.
"Redbox is more competitive if you only watch a DVD a week. The vast majority of people watch fewer than 3 movies a month," said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. "There is a reason Wal-Mart exists. People like the value proposition. And that's the same reason why Redbox exists."
There's also the fact that Coinstar is a more diverse company than Netflix. The company is even branching out into the coffee business. Earlier this month, Coinstar announced a deal with caffeine king Starbucks (SBUX) to offer Starbucks' Seattle Best Coffee in new Rubi kiosks in supermarkets and grocery stores. Coinstar's shares are up about 6% since the Starbucks news.
Coinstar and Redbox often get mocked for being so old-school, but not everybody wants to watch movies streaming on their smartphomes or iPad. Plus: Sometimes consumers actually have to leave their homes to shop for things. (Three cheers for analog retail! You go, Luddites!)
Still, it's not as if Coinstar risks being lost in the online video revolution. Redbox inked a streaming/DVD joint venture with telecom giant Verizon (VZ) in February. The service is set to launch in the second half of the year.
Netflix, on the other hand, continues to befuddle investors. While the worst appears to be over in terms of subscriber defections following last year's decision to charge people separately for DVDs and streaming and the ill-fated and short-lived decision to rebrand the DVD business Qwikster, Netflix is still a company faced with many challenges.
The company is spending a lot to license content from the major movie studios. It's now a content producer as well, with new shows like Kevin Spacey's "House of Cards" and the eagerly awaited revival of "Arrested Development." Netflix is also expanding aggressively overseas. These may all be smart long-term moves, but they are hurting earnings now.
"Netflix has a lack of visibility regarding international expansion. When will the losses narrow and margins improve?" said Steve Frankel, analyst with Dougherty & Company in Boston. "Netflix may also double down on more new markets."
Analysts now expect Netflix to eke out a tiny profit this year, after earlier projections of a full-year loss. But profit forecasts for 2013 have steadily come down over the past few months. That's not good. What's more, Netflix's revenues are no longer growing in the manner befitting a true go-go momentum stock. Analysts are predicting rather pedestrian sales growth of 13% this year and 15% in 2013.
Compare that with Coinstar. Its sales growth is expected to top 23% this year and earnings are expected to surge 35%. Revenues are only expected to increase 12% next year, while profits are forecast to rise only 10%. Wall Street analysts have been ratcheting up their Coinstar earnings projections -- a sharp contrast with how they're viewing Netflix.
And then there's valuation, which ultimately is what really matters. Netflix, despite its recent stumbles, still trades at 30 times 2013 earnings estimates. Coinstar, even after its big spike this year, is valued at just 12 times next year's profit targets.
Pachter, who has a "buy" rating on Coinstar and a "sell" on Netflix, maintains that Netflix is still overpriced, given that it faces so much competition in streaming video. In addition to the looming Verizon/Coinstar joint venture, companies like Amazon (AMZN) and Hulu, the online video firm co-owned by media giants News Corp. (NWSA), Walt Disney (DIS) and Comcast (CMCSA), are gunning for Netflix's streaming subscribers.
Finally, Pachter thinks that the DVD -- like the old man in Monty Python's Holy Grail -- is not dead yet. That's good news for Coinstar and not so much for Netflix.
"The movie studios are greedy pigs who want to sell their content to everybody. They would rather have more competition," Pachter said."Netflix is under a long-term assault, and DVDs are not going to go away for many years."