3 Reasons The Market's View Of Outerwall Is Wrong

Sep. 3.14 | About: Outerwall Inc. (OUTR)


Many people believe Outerwall is similar to Blockbuster and will have the same fate. This isn't true.

Because of Outerwall's track record of failed ventures, most investors don't believe its newest venture will succeed. However, the ecoATM is a great concept with a high probability of success.

The current market pricing of Outerwall suggests that the company is in decline. On the contrary, Outerwall is primed to grow.

When you search for investments, do you ever write off a company because of a preconceived notion? Well, what if that notion was wrong? What if things have changed? What if the stock is about to double?

While you pick investments, it's always important to keep an objective view of every company.

Read on as I debunk three misconceived notions about Outerwall (NASDAQ: OUTR) and explain how they create a buying opportunity for investors.

1. Outerwall isn't Blockbuster!
Many people look at Outerwall and see Blockbuster. They think that DVD's will become obsolete soon and Outerwall will follow in the footsteps of its movie rental predecessor. But this probably isn't true.

Blockbuster's brick and mortar business model was extremely expensive to run compared to Redbox. Blockbuster's high expenses forced the company to compete directly with Video on Demand offerings. In contrast, to differentiate itself, Redbox can lower its prices below those charged by VOD services (VOD services have to keep relatively high prices in order to stay profitable since studios have control over the pricing of digital content).

2. Despite the company's track record of bad ventures, the ecoATM could be wildly fruitful.
The half-baked ventures of Outerwall's past probably caused a lot investors to turn their noses at the announcement of the ecoATM. But this one is different... Seriously. In fact, the ecoATM is set to turn a profit in early 2015--something none of its previous ventures managed to do.

Unlike the sketchy ventures of Outerwall's past, the ecoATM is actually pretty awesome.

Photo from ecoatm.com

What is it?
The ecoATM is an automated recycling station that dispenses cash for used cell phones, tablets, and mp3 players.

Why will people choose ecoATM over phone stores?
There are a few things that set ecoATM apart from its competitors.

Most phone stores give their customers a trade-in value towards a new phone. This process can take up to three weeks. In contrast, ecoATM dispenses cash on-the-spot. This plays to America's love for instant gratification.

And unlike the vast majority of phone stores, ecoATM kiosks dispense cash for broken devices.

What does an ecoATM cost the company and how many are they making?
It costs Outerwall about $35,000 to build one of these ingenious machines. The company expects revenues of $100,000 to $120,000 per kiosk at 20%-25% operating margin.

Currently Outerwall is operating over 900 kiosks. Management plans to have 2,000 installed by the end of 2014.

How big could it get?
If things go as planned, ecoATM will generate well over $50 million of operating income in 2015. To put that into perspective, from its established operations, Outerwall generated $260 million in operating income during 2013.

It's tough to say exactly how large the new venture could become. But if it turns out anything like Redbox, which was valued at only $64 million in 2005, it could help double the value of Outerwall within the next few years.

So why isn't Outerwall's stock worth more?
Institutional investors need concrete data points and a strong record of success to support their investment in a particular company.

In the past, Outerwall experimented with numerous ventures including a self-service coffee kiosk called "Rubi", photo booths called "Star Studio", technology gadget-dispensing kiosk called "Orango" and a sandwich kiosk called "Crisp Market". Unfortunately, all of these ventures were discontinued. Outerwall's history of failed ventures is preventing many institutions from taking ecoATM seriously. And until certain institutions take ecoATM seriously, Outerwall's stock price will not reflect the growth potential of the venture.

3. The business is far from the "declining" stage of its life
Outerwall's price to earnings ratio is a measly 8.2 times trailing earnings. This low valuation suggests that the market views Outerwall as a declining company. This simply isn't true.

On top of the company's ecoATM venture, its current segments are primed for growth as well. The company has already begun an international expansion.

The company operates Redbox kiosks in Canada, and Coinstar kiosks in Canada, the UK, and Ireland. Management plans on installing kiosks in new countries in the future. If the company can continue this expansion, its revenue could increase dramatically.

A successful international campaign for its current kiosk offering will pave the way for start-up ventures such as ecoATM to expand beyond U.S. borders.

Outerwall has the potential to grow its revenue exponentially over the next few years. This potential for massive top and bottom line growth is simply not factored into Outerwall's current price.

It's not common and it's hard to find. But sometimes the stars align and certain misconceptions temporarily distort the market's view of a company.

The bankruptcy of Blockbuster scared many investors away from Outerwall even though its business model is completely different. Outerwall's bad history of acquisitions has caused institutional investors to ignore ecoATM and its growth potential. And, for whatever reason, the significance of Outerwall's international expansion has been virtually ignored by the masses.

Over time, as the company re-establishes a solid track record of revenue and earnings growth (through ecoATM and international expansion of Coinstar and Redbox), factors that have recently stunted Outerwall's stock price will dissapear and the price of Outerwall's shares may rise significantly.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.