“Hey I’m going to Blockbuster video tonight.” Lol. You never hear that anymore, thanks to the innovative ways to rent dvds. Today, there are two dvd-rental companies that are dominating the market- Coinstar and Netflix. Netflix gets all the news headlines, but Coinstar is quietly eating away market share from everyone. It’s funny how Coinstar started off with their strange coin counting machines, but now have their RedBox rentals accounting for almost all of their revenue. So which do we invest in? Well, I liked CSTR back in early March after the company surprised and guided higher on almost every pertinent category- revs, sales, rental market share. It was just a great growth stock. I also have been a fan of NFLX over the years because they know how to partner with other giants, like Nintendo, Sony, and Apple. What about heading into 2011?
I think between CSTR and NFLX, CSTR has much more potential as a stock and as a company. Meanwhile, examining both companies illustrates what exactly you need to look for when investing in growth stocks. From a marketing point of view, NFLX is much closer to leveling out on its productivity, while CSTR is still in its growth stage. So you like NFLX for its stability, but you like CSTR for its potential because you know it can get better. One way you can measure a company by its level of growth is by measuring their competitors. Remember, the more awesome/successful/brilliant you are, the more haters/copycats you have. Let’s call it the high school girl complex. The stock market is full of stocks that act like teenage girls. NFLX already went through those stages as many other brick-mortar companies started offer the same services. Only recently have I seen newer wannabe companies copy the RedBox system. Sure, RedBox didn’t start it, but they were the best at monopolizing, er, nationalizing it. Now I’m starting to see DVD kiosk rentals in the weirdest places, like 7-11 (I guess that would work), I guess because CSTR took all the best places.
Speaking of haters, you know a company is doing real well when other companies turn into whiners and seek litigation to slow them down, as is the case with CoinStar. The economic impact that RedBox has on the entertainment industry is quite interesting, as it was unexpected. What is happening is that these RedBox machines that offer rentals for $1 is dramatically eating away from DVD sales. Fox, Universal, and Warner Brothers got real pissed so now they have this arrangement where RedBox has to wait about 1 month after a DVD/Blu-Ray is released before offering it as a rental. 🙂
… and that’s another big reason why RedBox is better than Netflix. With NetFlix it takes a while to get a new release DVD so you’re stuck watching Heroes Season 1-4 on its streaming site. Meanwhile, RedBox is so much faster.
Anyway, I like both companies for their innovation and dominance in the industry. When you think about it, NFLX and CSTR are just fancy distribution companies. But you like that… you like to see during rough economic times, new companies emerge offering cheaper alternatives. And when you spot these companies, you buy them early and often.
The Final Verdict
So, honestly I have to say an investor, I like CSTR better than NFLX right here. And as a consumer, I’m much more satisfied with RedBox, in fact, I ditched my NFLX account. So, I guess if I were back in highschool, I’m dumping NFLX and taking CSTR to the prom.
CSTR is about to breakout, so monitor it everyday. Meanwhile, if you’re really crazy and aggressive, you can do a pair trade by shorting NFLX while staying long CSTR. Both have high p/e ratios, but NFLX is a bit high at 72 p/e, and NFLX earnings are leveling out while CSTR seems to be steadily growing.
Gio, nice post. I agree about CSTR’s potential as a stock. But not sure about NFLX as short especially for the next few weeks at least. What do you think of NFLX mammoth short float? Also, check out the open interest configuration on NFLX and the large amount of puts compared to calls at almost every round figure level between 120 and 170. Wouldn’t that offer support of all sorts? Finally, check out the fact that NFLX was up this entire year. Laws of performance chasing say that such stocks rarely dip in December and early part of Jan. If you meant from a long term pov, I resonate with that more. I personally like NFLX short long term but am long intermediate term. Would be nice to hear your thoughts.
(Also been posting on NFLX in my prior posts on king of p.g. and regular p.g. Feel free to comment)
Hey StocksRider. The NFLX short play is a pair trade play, like a generic hedge against the CSTR longs. That’s why I said, “if you’re crazy” or “aggressive”, meaning, I’m not 100% for it, but it’s something to think about. I actually like NFLX as a company and agree on the short float playing against the bears…
http://ibankcoin.com/gioblog/2010/04/22/what-in-the-netflix/
http://ibankcoin.com/gioblog/2010/03/10/net-flix-off-the-bears/ …does this answer your question about the float? 😉
Right now, the volume on NFLX is way out of control from those posts, and so, although I like it, I like it much less than back in March. Hence, CSTR is looking more like NFLX in 2009 so I’ll jump on that wagon.
So, bottom line: Get long CSTR and leaving NFLX alone is okay with me. Short NFLX on itself was not recommended, since it hasn’t worked yet. But shorting NFLX (while long CSTR) on a break of support ( @164) is a great move if market tanks.
i’LL check out your posts when I get home. Gotta go return a DVD. Lol.
Thanks Gio. We are on the same page 🙂
I just killed it on NFLX calls. It is surging after hours. It has been added to S&P500. I talked about this being added to major indices on Oct 31st here – http://www.ibankcoin.com/peanut_gallery/index.php/2010/10/31/follow-up-on-netflix/
It should also be added to NASDAQ 100 this month. So more surprise to the upside may be remaining.
wow, i thought it was already in the SP500. replaces Office Depot? hehe. congrats on banking on it!
GMCR getting owned. yikes.