Verizon And Coinstar: The New Video Kings

by: Stock Croc

Verizon (NYSE:VZ) and Redbox [owned by Coinstar (NASDAQ:CSTR)] are teaming up to provide Internet video streaming services. That news will affect shares of (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and News Corp. (NASDAQ:NWSA) as well, so let's see if any of these stocks are worth purchasing right now:

While Coinstar, Inc. used to be primarily known for its coin-conversion services, the company's Redbox unit is becoming increasingly attractive to investors. The company's DVD/Blu-ray rental kiosks can be found nationwide, and many consumers find them to be quite convenient. A partnership with telecommunications giant Verizon figures to further the business's development. For instance, one way that Coinstar will benefit from the Verizon partnership is when customers try to find a piece of media that Verizon doesn't offer streaming for. In this case, the customer will be directed to the closest locations that offer a Coinstar kiosk. In my opinion, Coinstar is an attractive alternative to buying Netflix stock. Netflix skyrocketed after delivering a strong earnings report, and the stock is now overvalued. With price to earnings at 19.24, price/earnings to growth at 0.81, and price to sales at 0.87, the time to buy Coinstar is now. I predict significant growth for Coinstar's Redbox unit going forward, as the unit continues to make deals with retailers around the country to offer new kiosks. Coinstar has also been working hard to renew deals with retailers it has worked with in the past such as Wal-Mart (NYSE:WMT). Another story for Coinstar has been its refusal to accept poor terms offered by Warner Bros., and it is nice to see Coinstar management exercising its power.

Verizon Communications Inc. already has its FiOS cable-TV service, but the new partnership with Coinstar significantly broadens Verizon's exposure in the home entertainment industry. The president of Verizon's consumer business, Bob Mudge, had this to say: "We've made a conscious decision to innovate and get involved with this market because it's legitimate and growing, and we think the partnership with Redbox gives us huge upside." I am inclined to agree with Mr. Mudge, although investors should be aware that Verizon is in a sense drawing first blood on what could become very competitive. While other cable operators limit their streaming services to their own customers, Verizon's move represents a smash-and-grab strategy designed to lure anybody who wants more streaming options. As discussed in the Coinstar section, I suspect that Verizon and Redbox will enjoy success by working together, and Verizon is attractive for a number of other reasons. The stock's dividend yield of 5.3% can help investors bring in income for years to come, and Verizon may be able to increase its dividends in the future when it doesn't need to subsidize so many iPhone upgrades. With nearly $30 billion of operating cash inflow during fiscal year 2011, I would consider Verizon to be in a supreme financial position.

By giving customers the option to rent, download, or purchase a physical copy, Inc. has long been the king of video. That's led to a market capitalization of over $80 billion, and the company's new Kindle Fire device has also made waves. In fact, the latest rumors are that will open up a brick-and-mortar store in Seattle, primarily to focus on selling Kindle products. Amazon also just launched a Sports Collectibles Store to take advantage of the recent Super Bowl craze. The store will have a wide variety of items, with some collectibles selling for merely a few dollars and others priced in the tens of thousands. Yet another interesting launch for Amazon comes from India. There, will allow Indian consumers to search for items and then purchase them online, although usually on a third-party site. While these developments are certainly exciting, I find it hard to recommend stock right now. With a price to earnings ratio of 134.31 and price/earnings to growth ratio of 4.86, this stock is probably overvalued. On the other hand, eBay (NASDAQ:EBAY) has a price to earnings ratio of 13.29 and price/earnings to growth of 1.14, both of which seem much more reasonable.

With Netflix, Inc. focusing more on streaming than ever before, a deal between Coinstar and Verizon could prove to be an interesting challenge for Netflix. Verizon's immense amount of resources will allow to be a formidable competitor, and Coinstar has a nice foothold in the arena of physical discs. While Netflix is no longer marketing its physical disc services, they are still offered, and strength from Coinstar's Redbox could force Netflix's hand one way or the other. In other news, Netflix is beginning to offer exclusive content. For instance, the company is offering the Lilyhammer series, which stars Steven Van Zandt from "The Sopranos." While this show may appeal to a small niche of Netflix customers, I'm not sure if Netflix has the brand strength yet to really make exclusive content work. I also have to question the stock's current price of just over $128. That puts the price to earnings ratio at 30.24 and the price to sales ratio at 2.19, and those numbers seem a bit high to me. Until Netflix can truly solidify its position after the fiascos of last year (unpopular price hikes, mass confusion about the DVD-by-mail service), I prefer an up-and-comer like Coinstar. Gross margin of 36.34% is impressive for Netflix, however.

Fox Entertainment Group, owned by News Corp., has a 31% stake in Hulu. In fact, due to Hulu's position as a major player in the streaming business, News Corp. could be adversely affected if Verizon's partnership with Coinstar turns out to be a big success. On the other hand, different headlines figure to impact News Corp. in the near future. For instance, the movie "Chronicle" from 20th Century Fox topped the preliminary weekend movie charts at $22 million. In fact, 20th Century Fox's Chris Aronson thinks the studio may be onto something: "There's something very unique and very innovative about this movie that [the younger demographic] got wind of. There was a lot of pre-release chatter on social media that made a connection with this audience." Meanwhile, News Corp. is still fielding questions about its News of the World phone hacking scandal. As described here, it now appears that a crucial e-mail detailing some of the issues at hand in early 2011 was deleted from James Murdoch's computer. In my opinion, News Corp. may not be the best option for investors seeing as cheaper alternatives are available. For example, Time Warner (NYSE:TWX) offers better price to earnings (14.43) and price to sales (1.34) ratios, and it also has superior margins (43.89% gross and 20.29% operating).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.