Seeing Red

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently sat in the car while my sister ran into the drug store to pick up a prescription. Being the height of a very busy flu season, I knew I’d be waiting a bit. So I adjusted my seat, sat back, and waited.

I watched a bevy of people go in and out of the drug store, and then I turned my attention to the red box outside the building. You know the one; It’s one of those red vending machine-like boxes from Coinstar (NASDAQ: OUTR) that dispenses some of the most current and popular movies and video games on DVD and Blu-ray disc.

During the some twenty minutes I watched the traffic at that particular Redbox, I counted nine people that rented a movie or game. What I found so interesting was that no one that approached the machine walked away empty handed. Plus, all spent just a brief few minutes completing their transaction.

I later stopped at the local grocery store and found a very similar scenario at the Redbox there. By this time I was more than intrigued and looked for the signature Redbox machines all over. The one outside a McDonald’s had a line the first time I drove by, and the one near 7-Eleven had a huddle of kids making selections.

I had heard these Coinstar kiosks are taking a healthy bite out of Netflix (NASDAQ: NFLX). Skeptical at first, I am now totally convinced.

Netflix has been experiencing slower growth and subscriber defections due to the scores of new players in the Internet and on-demand movie, TV and gaming subscription business.  It never really recovered after the company, in July 2011, announced it would separate current subscription plans into two separate plans: one for instant streaming and the other for DVD rental.  Members were outraged, and three months later Netflix scrapped the plan. After year of enjoying explosive growth, the Los Gatos, California company reported an 88% plunge in Q3 profits of 2012.

Amazon (NASDAQ: AMZN) also offers instant video billed as DVD quality. But most of its offerings are movies that have been out for a while. Plus, Amazon Instant Video only offers streaming video service for a flat fee. Customers who don't want to get locked into a long-term agreement,  preferring to pay for videos as they are are viewed, find Redbox's option more to their linking.  Amazon Video is more of a threat to Netflix than to Coinstar.

Conversely, Redbox’s parent company Coinstar, which also runs a successful coin counting machine business, has been enjoying several consecutive quarters of increasing profits, buoyed by Redbox’s success. At last count, data shows Redbox had more than 42,000 kiosks dotted at more than 34,000 locations.

In an effort to further sate our world obsessed with instant gratification, Coinstar partnered with Verizon in July 2012, launching Redbox Instant, a direct blow to Netflix.

The impressive traction Redbox has made for Coinstar has prompted a bevy of analysts to raise opinions, earnings estimates, and price targets. The consensus among the bullish bunch is an “overweight” rating and a robust $63.50 price target.

Constar continues to show off its prowess with ambitious plans for the future.  It has its sights on doubling revenue over the next five years, with growth and profits coming from expanding existing businesses and new ventures.

Some new ventures may include selling concert tickets, coffee, refurbished electronics, cosmetic samples, fresh food and secondhand gift cards from kiosks.

It’s exciting and fresh ideas like that will keep Coinstar growing and thriving.

Coinstar is wisely thinking outside of the box.

DianeAlter has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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