Redfish,
Completely disagree with you. I think that it's incorrect to compare Netflix to a 6-month old Blockbuster and then extrapolate this false comparison into the future. BBI is still going through a learning curve, but will continue to catch up. In 6 months, BBI has attracted over 500K subs and opened 23 distribution centers. Blockbuster's progress has been amazing. Even Netflix acknowledged that it underestimated Blockbuster.
I'm long on BBI and think that it will be the Apple of 2005. I'm looking for $15+ over the next 12 months.
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Here's what I like about BBI:
(1) Blockbuster is a much different and more appealing company than it was 6 months ago, launching new initiative after new initiative. The best initiative is MoviePass, which lets you rent unlimited DVDs in-store for $25 (2-out at a time). With MoviePass, consumers have an incentive to visit the store frequently since the monthly fee is the same whether you rent 2 DVDs or 40. MoviePass should increase in-store traffic, which should generate additional revenue from DVD sales, candy, etc.
In addition, BBI launched DVD and Game Trading, which allows consumers to return any DVD or game to a Blockbuster store for minimum $5 store credit. This should also increase in-store traffic. Why go through the hassle of selling your used DVD on Ebay when you can get the same price at Blockbuster?
Blockbuster is now an all-in-one entertainment destination, where kids can play, buy, rent, or trade games, and families can buy, rent, or trade DVDs. You can rent 1 DVD at a time or pay a monthly subscription fee. Nobody else offers the breadth of choice that Blockbuster offers.
(2) Blockbuster stores are a strength, not a weakness. In fact, the stores represent a sustainable competitive advantage. (A) The stores can be merged with online, so that new releases can be picked up and returned at the store while obscure titles can be shipped to/from the customer; (B) The stores allow customers to get their DVDs ASAP rather than wait 1-2 days for postal delivery. The stores are also open on weekends and holidays; (C) The stores allow consumers to physically browse inventory; (D) The stores provide a venue for Blockbuster to unload inventory. After renting a DVD a dozen or so times, BBI routinely sells the DVD as used (1 DVD for $12, 2 DVDs for $20, 3 DVDs for $25); (E) The stores provide a venue to cross-sell (candy, DVD sales, etc.).
(3) Amazon will likely partner with Blockbuster. Amazon definitely wants to get into the online DVD rental space, and it's clear that Amazon will not get into the US market on its own due to tax implications as well as the hundreds of millions needed to build the required distribution centers and stock DVD libraries. Clearly, Amazon will partner with an existing player. And its partner will clearly not be Netflix. Netflix has made many public comments that make it clear that it views Amazon as a competitive threat rather than a partner. In addition, Amazon has historically partnered with brick-and-mortar retailers (Toys R Us, Circuit City, Borders, etc.).
(4) Brick-and-Mortar booksellers have thrived, and so will Blockbuster. Back in 1999, people used to say that Borders, Barnes and Noble, and Books a Million would go bankrupt, as digital media would kill them on one end while Amazon's online convenience and cost structure would kill them on the other end. Fast forward 6 years: Despite MP3s and Amazon's growth, brick and mortar booksellers have thrived, as people like to go outside and shop/browse. In 1999, Borders (BGP) traded at $12. Today BGP trades at $25+ and is at a 52-week high. In 1999, Barnes and Noble (BKS) traded in the teens. Today BKS trades at $31+. In 1999, Books a Million (BAMM) traded at $1.5. Today BAMM trades at $9+.
(5) BBI trades at a discount considering that Hollywood Entertainment (HLYW) attracted a $1.2 Billion cash buyout. Considering that BBI is the market/brand leader and generates 3 times the revenue and free cash flow that Hollywood does, I don't think that it's unreasonable to value BBI at 3 times the value of Hollywood. A $3.6 Billion valuation for BBI (after considering $1 Billion in debt) equates to over $14/share.
(6) BBI trades at a discount to its brick-and-mortar retail counterparts, like Borders and Barnes and Noble. Barnes and Noble has a market cap of $2.2 Billion, with annual revenue of $6.5 Billion and annual free cash flow of 300 Million. Despite that Blockbuster generates 3 times the free cash flow and almost equal revenue that Barnes and Noble does, BBI has a market cap of only $1.6 Billion.
In the end, Netflix has no sustainable competitive advantages. With its growing list of distribution centers and the imminent linking of its stores with its online site, Blockbuster will eliminate any service advantage that Netflix currently has. And with its likely partnership with Amazon, Blockbuster will eliminate any website advantage that Netflix currently has.
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cbs.marketwatch.com
Analyst cuts Netflix target to $3
Says company still underestimates Blockbuster
By Herb Greenberg, MarketWatch
Last Update: 12:50 PM ET Jan. 25, 2005
SAN DIEGO (MarketWatch) -- Wedbush Morgan analyst Michael Pachter already had a "sell" on Netflix going into the company's report of fourth-quarter results. Tuesday his firm added the DVD rental company to its "focus list" as a recommended short sale with a $3 target. Arch-rival Blockbuster is on the list as a "buy."
As I noted Monday, Netflix (NFLX: news, chart, profile) officials conceded on an earnings call that they had "underestimated" the competitive threat of Blockbuster.
Pachter agrees in a note to clients, saying, "Netflix continues to underestimate Blockbuster's market position." He says that over time, he believes Blockbuster will attract more than half of all online DVD rental customers.
Blockbuster, he says, has a lower cost structure than Netflix for online rentals. "This cost advantage will be fully leveraged once Blockbuster migrates fulfillment to the store level," he says.
If that happens, Pachter estimates that Blockbuster will have at least a $2 cost advantage over Netflix per customer each month, "primarily due to lower overall inventory costs."
Pachter also said he was surprised Netflix mentioned the possibility that Blockbuster's competitive challenge could impact its debt covenants. "We note that these same banks are apparently willing to lend Blockbuster an additional $1 billion or more in pursuit of Hollywood Entertainment," he says, "and we think that Netflix management is mistaken in its assessment of Blockbuster's financial health."
He also says that investors "misperceive" the potential in the online DVD rental business by Amazon. "Amazon intends to enter only if it can find a suitable fulfillment partner," he said. Considering that Amazon tends to link up with brick-and-mortar retailers, he says the most suitable partner would be Blockbuster. |
