Outerwall Could Be the Next Tesla

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Outerwall (NASDAQ: OUTR), formally known as Coinstar, holds the potential for big, short-term gains.

Shares of Tesla (NASDAQ: TSLA) have rocketed 150% in the last three months, and so too could Outerwall. A combination of factors including a high short interest and the potential for bullish catalysts in the near-term could propel shares of Outerwall sharply higher in the coming months.

Tesla’s incredible rally

Electric carmaker Tesla has been one of the best stocks to hold over the last three months, up an incredible 165% since early May.

Prior to the rally, Tesla had an exorbitantly high short interest. Almost half the floating shares had been sold short by Tesla bears. Longboard Asset Management, who impressively predicted the run in Tesla back in April, used the high short interest as a major part of its bull thesis on Tesla.

A perfect storm of positive events (a better than expected quarter, repayment of government loans, fast charging network) prompted bears to cover. As Tesla’s share price has risen, its short interest has fallen, having been cut in half since April.

Of course, the rally might just be getting started. Analysts at Dougherty & Co. and Morgan Stanley believe the firm could be worth as much as $200 per share. That would give Tesla a market cap of roughly $20 billion, making it worth slightly less than half of General Motors.

That seems insane given that Tesla is on track to sell just 21,000 cars this year -- GM sold more than 9 million in 2012.

Still, with a short interest more than 20%, the short squeeze in Tesla may be far from over.

Outerwall’s short interest is comparable to Tesla’s

Outerwall’s short interest is currently above 40%, almost as much as Tesla’s back in the spring. It might not triple, but a string of positive events could trigger a similar short squeeze.

What are those potential positive catalysts?

Outerwall has begun pushing some of its new vending machine concepts. Most notably, the Rubi, a machine that serves up gourmet coffee. Specifically, Seattle's Best Coffee, a Starbucks’ brand.

But for now, Outerwall still derives most of its value from its subsidiary RedBox. Its movie and game rental kiosks are a source of steady income for the company, as competition from bricks and mortar stores like Blockbuster and Hollywood Video have all but disappeared.

This fall could be great for RedBox. September, for example, will see the release of both Star Trek: Into Darkness and Iron Man 3. At the same time, the fall video game season should benefit from the release of two new consoles, as well as Grand Theft Auto 5, the first installment in the popular series in several years.

RedBox Instant: coming soon to a streaming video player near you

RedBox (in partnership with Verizon) has also started heavily pushing its RedBox Instant service. RedBox Instant harkens back to the Netflix (NASDAQ: NFLX) of old, offering DVD rentals and streaming movies for one low price. Reviews of the service show that there’s still much to be desired, but the company has been aggressive in bringing it to new platforms (it was added to Roku on Monday).

A surprisingly strong reception to RedBox Instant could benefit Outerwall shareholders, and might even put pressure on Netflix. Although Netflix’s management has shifted the focus on the company wholly to streaming video (since the Qwikster debacle, it seems clear Netflix doesn’t care much for its DVDs-by-mail business) it still has some 7.5 million DVD-by-mail customers.

What’s more, these customers provide Netflix with a great deal of cash. Despite having four times as many members, Netflix’s domestic streaming business brought in just 150 million last quarter -- DVD-by-mail made 109 million.

For $8 a month, RedBox instant gives subscribers four DVD rentals and unlimited streaming video. To the millions of Netflix subscribers who are streaming-only, that isn’t going to a make a difference (Netflix has a better library of content). But for those still getting movies by mail, RedBox Instant might be an attractive alternative.

Investing in Outerwall

Analysts at Wedbush named Outerwall one of their best investment ideas on Monday, and I’m inclined to agree.

A string of positive catalysts -- strong demand for RedBox rentals, RedBox Instant and the new Rubi machine -- could propel the stock higher. Based on valuation, Wedbush believes the stock could hit $78.

Highly shorted stocks like Tesla and Outerwall can have sharp moves to the upside, as bearish traders are forced to cover their losing bets. If Tesla’s recent activity is any indication, $78 might be too conservative.

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Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Netflix and Tesla Motors . The Motley Fool owns shares of Netflix and Tesla Motors . 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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