Over recent weeks search and website analytics have proven to be an invaluable tool in determining the potential for a company to announce an earnings report surprise. The justification is simple, companies that derive their revenues from advertisements or sell directly through their websites will clearly benefit from increased traffic, users viewing more pages and in general spending more time on a website. If users search more often for the company through search engines, it could imply there is a greater demand for a product being sold.
Just this past week Facebook (FB) announced during its earnings report a beat on both the top and bottom lines . Website analytics indicated that users had spent more time on the Facebook website, were viewing more pages, and fewer users were "bouncing" from the website. "Bouncing" refers to users who view one page and then leave.
Before its earnings release yesterday, website analytics showed that users of the Zynga (ZNGA) website had spent a significant amount of time more on the company's gaming website over the past 3 months, approximately 28% more time. Again, this website exhibited an improved "bounce percentage" and more pageviews per user. After hours the company announced earnings beating street expectations, with the company showing a one cent profit for the quarter versus analyst estimates for a three cent loss .
While any correlation between two independent earnings reports and their analytics may be deemed more of a coincidence than anything, it is still worth noting that there may be some association. As such, I've investigated three companies, Michael Kors (KORS), LinkedIn (LNKD) and Coinstar (CSTR).
You can find the article regarding the search analytics for Michael Kors here, and my latest article pertaining to LinkedIn's web analytics here. What follows though is the analysis for Coinstar and its recent web activity.
Company Profile (from the Coinstar website)
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. Redbox also offers DVD rentals through additional kiosks acquired from NCR Corporation in June 2012.
Search and Website Analytics
Thanks to Google (GOOG), it can be seen that searches for Coinstar's automated DVD and Game rental kiosks have been increased sequentially between October 2012 and December 2012, a portion of this period which will be included in the upcoming earnings announcement. Skeptics may argue that this increase in searches may be a direct result of the population inquiring about the company's new upcoming streaming service in a joint venture with Verizon (VZ). Any investor in Coinstar is hoping that is the case as it would indicate strong interest/demand for the product. More than likely the searches are driven by the DVD renting audience as the recent peak in "Redbox" searches also corresponds with recent peaks in searches for "Redbox Coupons" and "Redbox Codes". Both of these searches would be a bullish indicator for the stock since the only time you need a coupon is if you are actually renting!
Looking at the Redbox.com website analytics, we can see that users have "bounced" away from the site less often over the past three months (down 5%) and have viewed more pages per user during the same time period (up 3.9%). Such statistics may indicate that users are spending more time searching for movies, which they can reserve online, and finding locations of kiosks nearest to them. While there is no definitive proof that these statistics will yield higher earnings, it is certainly a starting point for a bullish argument.
On a fundamental basis, there is little working against Coinstar's favor. With a P/E ratio close to 10, the shares trade at a discount to its streaming competitor Netflix (NFLX) which has a Forward P/E of 69, and to the S&P as a whole which currently has an average P/E of 15.6. Furthermore, analysts anticipate earnings growth of approximately 10% over the next year and 17% over the next 5 years, an underestimation in my view. With the addition of kiosks through the NCR deal, testing for coffee kiosks, and international expansion plans, I have confidence that the company can grow at a rate over 20% over the next 5 years. In addition to its current undervaluation, as of the most recent reporting, there are approximately 43% of the outstanding shares held short. In the event of an earnings beat, or even if earnings meet consensus, there is the potential for a significant short squeeze. [3,4]
Over recent months it seems the company has shifted their method of "couponing", moving away from straightforward "free one-day rentals" and more towards "Rent Two DVDs, Get 50 Cents Off" coupons. Such a transition might ease the compression of margins, even if slightly.
It is my view that Coinstar exhibits upside potential in share price that greatly outweighs any downside risk. To take caution going into earnings I plan on holding short term put options, as insurance to cover against an earnings miss, and long term call options, under the presumption that earnings will meet or exceed expectations and the stock will move higher on valuation and a short squeeze. Both options will be at strike prices that are near-the-money.
Additional disclosure: I am Long GOOG, FB, ZNGA call options. I am Long LNKD put options. I will be looking to open a long and short position in CSTR.