There are plenty of articles detailing why Netflix (NFLX) is a good short. These articles make some great points, and Netflix may very well be a good short, but in our opinion it is primarily a valuation short.
Coinstar (CSTR), on the other hand, faces many of the challenges that Netflix faces, but has no subsciber base and no streaming strategy. RedBox is a business that will ultimately be rendered obsolete. The traditional coin business is also in secular decline, which the company has offset with price increases (higher percentage take on the coin kiosk) for the time being, but the secular tailwinds that caused such bullishness around Visa (V) and MasterCard (MA) (the move to a cash/coinless society) create secular headwinds for the coin business.
Investment Thesis
Coinstar’s primary growth engine, the RedBox DVD rental business, dominates an industry that is fast becoming obsolete – physical content delivery. As movies-on-demand and internet streaming of media become more and more prevalent, the DVD industry will accelerate its secular decline. Coinstar is currently priced like a growth stock and garners the correspondingly high multiple because it has been a strong growth story by taking significant market share, albeit in a slowly dying medium. As the company saturates the market, its organic growth will slow, and as the industry’s secular trends accelerate, this will become overwhelming. Ultimately, the obsolescence of DVD will cause sales to plateau, then decline, resulting in a significant multiple contraction.
Bear Case:
- There is a strong secular headwind as DVD will inevitably be rendered obsolete by video-on-demand, web streaming, and digital media.
- Obsolescence, in our opinion, is likely to happen sooner and faster than the 10 to 20 years physical DVD rental companies would like to believe.
- In the meantime, new competition within the space from NCR’s Blockbuster Express
