I am a big believer in investing in what you know. My relationship with nearly every company's stock that I own is initially as a customer. That is why I own companies like Walt Disney (DIS), Apple (AAPL) and Verizon (VZ). When I find a product or service I really enjoy I investigate the company to see if they might make for a good investment. My reasoning is that, as a customer, I will know if the product quality or customer service degrades. Being a customer provides simple insights that analysts that are not customers seem to miss.
That is how my relationship with Coinstar (CSTR) started as well. I have been a Redbox customer for a few years now renting a DVD or Blu Ray once or twice a month. I am a Netflix (NFLX) streaming subscriber and I use Redbox when a newer title is not available on Netflix. I started thinking of Coinstar as a possible investment when Blockbuster (OTC:BLOAQ) declared bankruptcy. The number of Redbox kiosks seemed to be growing exponentially and appearing in the businesses that I regard as having good leadership, companies like McDonald's (MCD) and Walgreens (WAG).
When I stumble onto what appears to be an obvious investment opportunity I look for bear case first. If it's obviously a good investment and appears to be cheap then I MUST be missing something, right? That is how my analysis of Coinstar began. The bear case wasn't hard to find as Jim Chanos, as recently as April 2012, stated he was shorting the company. He believes their fate is inextricably tied to the DVD which is steadily fading into oblivion.
Respectfully, I disagree with Jim Chanos. Below I will outline why I am long Coinstar and as an added bonus I will offer a potential opportunity that even the leadership of Coinstar may not have considered.
1. The DVD/ Blu Ray still has legs
The DVD will eventually go the way of the VHS, Betamax, 8-Track, cassette tape and laser disc. Of this, I have no doubt. The real argument is where are we in the DVDs life cycle? There was only a 2% decrease in sales/rentals for blu ray and DVDs from 2010 to 2011. During that time the number of households that have blu ray players increased by 38%. Those numbers do not indicate a rapidly diminishing demand. Redbox has helped the DVD and Blu Ray remain relevant based on their affordable and convenient alternative to brick and mortar stores like Blockbuster or expensive on demand programming. I would argue that DVD and Blu Ray has 5-7 years left because there is not a single streaming service that has everything the consumer wants. DVDs and Blu Rays are used as supplemental service to fill the gaps in every available streaming service.
2. Coinstar Branching out
The demise of DVDs is coming eventually. Everyone knows it including Coinstar and they are preparing for it appropriately by leveraging their brand name to branch into new business areas. Coinstar has three exciting, strategic relationships that will transition them safely beyond DVD kiosks. These are just a few of the innovations they are working on.
Redbox Instant is a partnership with Verizon to provide instant streaming video bundled with DVD/Blu Ray and video game rentals. This will finally put Coinstar in direct competition with Netflix. I have argued that this will actually be the first real competition Netflix has seen in a previous article. The current price point is $6 a month which may be just low enough to lure Netflix subscribers away or even allow current Netflix subscribers to subscribe to both for about $14.00 a month.
Coinstar is also rolling out 5,000 coffee kiosks, nicknamed Rubi, in a partnership with Starbux (SBUX) during its initial launch. Coinstar is not going to be able to leverage its existing relationships with McDonald's and Walgreens for kiosk locations because they already have their hands in the coffee business. Instead they will be focusing on venues that don't already have their own coffee brand. For example, Safeway (SWY) has already signed up for 50 kiosks.
Coinstar has announced Redbox Tickets, a program launching in Philadelphia to provide live even ticket sales through kiosks. The concept is to sell live event tickets to concerts, sporting events and the like at face value or for a $1 charge. This would put them in direct competition with ticket master and Live Nation (LYV). With such a low premium on the ticket price and the national network of over 40,000 kiosks at its disposal, Ticket Master and Live Nation should be scared.
I believe in this company's leadership and initiative. They see the end of DVDs coming and are planning for it by leveraging their newfound name recognition to gather strategic partnerships with other industry leaders. It is important to remember that Coinstar is not a DVD rental company. They are an automation company. They have a product and a plan. That is what Apple had when they launched the iPod and turned it into a mobile device revolution, or Amazon (AMZN) when they transformed an online book store to a retail and cloud computing behemoth. Jim Chanos has written off Coinstar as if they are standing still or hanging onto a delusion that DVDs are going to be their cash cow indefinitely. If that were true, I would write them off as well, but nothing could be further than the truth. So, Mr. Chanos, I would like to go on record and say that you are wrong about Coinstar. I am long Coinstar.
That being said, I do have one suggestion for another strategic partnership or perhaps an acquisition. Medbox Inc (OTCPK:MDBX) provides machines that dispense medicines and merchandise based on biometric identification (fingerprint identification) including kiosks that supply medicinal marijuana. Based on the legalization of marijuana for medicinal purposes passed in 5 states and the legalization for recreational use passed in Colorado in last election these types of kiosks could be a high growth industry. The addition of biometric identification technology could also be a nice addition to their technological portfolio. Based on the variety of kiosks Coinstar is working on and I do not think this is outside of the realm of possibility.
Coinstar, Inc. is a leading provider of automated retail solutions offering convenient services that make life easier for consumers and drive incremental traffic and revenue for retailers. The company's core automated retail businesses include the well-known Redbox® self-service DVD and video game rental and Coinstar® self-service coin-counting brands. The company has approximately 42,400 Redbox DVD kiosks and 20,300 coin-counting kiosks in supermarkets, drug stores, mass merchants, financial institutions, convenience stores, and restaurants.