In the grand scheme of things, it can’t be that surprising that Outerwall (OUTR) is hitting …. well, a wall.
The automobile replaced the horse, the light bulb replaced the candle, and the gun replaced the sword. It only stands to reason that streaming online-video — largely courtesy of Netflix (NFLX) — is replacing the DVD as a means of on-demand entertainment.
And yet, today’s 22% drop from OUTR stock decidedly indicates that investors were indeed surprised to hear the company’s revised revenue outlook for 2015.
The irony? With the 47% tumble since mid-July, Outerwall shares are now trading at a trailing P/E of 11 and a not-entirely-crazy forward-looking P/E of 5.
How does a consistently profitable stock get that cheap? It’s the market’s way of saying it doesn’t believe the company will be consistently profitable for much longer.
The market is right.
A Dialed-Back Outlook
Outerwall, the company that owns and operates 35,000 RedBox DVD rental kiosks peppered across the country, told investors yesterday afternoon to expect less than had been anticipated for fiscal 2015, ending at the end of this month. Rather than a top line of somewhere between $2.205 billion and $2.24 million, Outerwall now believes it will report revenue of between $2.17 billion and $2.19 billion this year.
For perspective, Outerwall drove a top line of $2.3 billion last year.
The bulk of the contracted outlook stems from RedBox-related woes. The movie-rental unit accounts for roughly 80% of the overall company’s business, and is on pace to drive sales of $1.75 billion to $1.765 billion this year. That’s down slightly from previous expectations, and down considerably from the year-ago RedBox revenue total of $1.975 billion.
Lower revenue will lead to lower earnings, of course. Per-share profits are now projected to roll in somewhere between $7.65 and $8.15, down from prior guidance of $8.82 to $9.52 per share of OUTR stock.
The Tipping Point
Truth be told, the results aren’t terrible. Outerwall is still a solidly profitable outfit, and it’s not as if revenues simply vanished overnight. The company has time to regroup and mount an offensive, so why all the pessimism so soon?
Because, while the results haven’t yet become dismal, in retrospect OUTR investors can look back and see 2013 was the tipping point for the company because it was the tipping point for DVDs. More directly, 2013 was the point in time where DVD rentals stopped growing, finally yielding to the inevitable pressure that Netflix — and Amazon (AMZN) — were putting on the DVD rental business with streaming alternatives.
As for ways to halt the decline, there isn’t a lot that can be done about it now. In fact, there’s nothing that can be done about it now. Just ask the companies that made VCRs and VHS tapes.
As ancillary evidence to the internal scramble/desperation Outerwall is dealing with, one only has to look at the revolving door its management team is using. Along with the dire 2015 projections, the company also announced on Monday that RedBox President Mark Horak was stepping down after less than two years on the job. Outerwall CEO Erik Prusch will temporarily fill in until a permanent replacement for Horak is found, though Prusch only became CEO in July of this year.
That’s an awful lot of turnover, causing even more instability for a company that really can’t afford it.
Or, maybe it’s a hint that nobody is working out simply because the business model itself is obsolete.
Bottom Line for OUTR
The company admittedly had a good run, but few things last forever. Technology changes things. Different packages and modes of delivery changes things. Netflix and Amazon Prime are the new norm, just like DVDs eventually displaced VHS tapes to become the new norm. There’s no shame in becoming obsolete.
On the other hand, there’s no money in being a martyr. If you think OUTR stock is a poor performer now, just wait and see where it is two years from now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
