Redbox: New Video Rental Competition for Blockbuster and Netflix

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Includes: BBI, MCD, NFLX, OUTR
by: Phillip Lyon

One of the investment strategies Peter Lynch touches on in his book One Up on Wall Street is to invest in companies that that you see every day. For instance, if you notice a new restaurant or retail store is performing really well you should check out the company’s stock (assuming it’s a publicly traded company) and see how the stock is performing. This can lead to potentially profitable investment opportunities.

One company that I have recently checked out is Redbox. If you don’t know the company by its name you have probably seen its DVD kiosks at a McDonald's (NYSE:MCD), Walmart (NYSE:WMT), or Walgreens (WAG). I first saw Redbox kiosks a couple of years ago but I never rented a movie from one until a few months ago. Now that I have tried it out I will only use Blockbuster (BBI) as a second option to Redbox.

The kiosks offer about one hundred new releases and other popular movies for only a dollar a night. This is significantly cheaper than Blockbuster (the last time I rented a movie from Blockbuster it was around $4.50 for a two day rental). In addition to being significantly cheaper than Blockbuster, Redbox kiosks offer another big advantage. You can return a DVD to any Redbox kiosk location. This makes renting a DVD from a Redbox kiosk significantly more convenient than renting from a Blockbuster location (where you can only return a DVD to that particular location).

Due to the significant advantages over Blockbuster I decided to check into Redbox and I found that it is owned by Coinstar (NASDAQ:CSTR) (majority owner), McDonalds (MCD), and a handful of other companies. Redbox planned to go public through an IPO but those plans got delayed due to the brutal market conditions.

The company is also growing very quickly. Redbox saw a 200% growth in revenue last year. It will only be a matter of time before the company goes public and when it does it would probably be a good idea to pick up some shares (depending on valuation).

The success of Redbox is also going to accelerate the decline of Blockbuster, which is already facing significant competition from Netflix (NASDAQ:NFLX). Therefore, I would recommend against taking a long position in Blockbuster and I would consider shorting the stock.

Disclaimer: I do not have a position in any of the companies mentioned.