The last decade’s advances in technology have destroyed, or are in the process of destroying, a significant number of previously thriving companies. It’s almost hard to believe, but Blockbuster, Barnes and Noble (BKS), BlackBerry (BBRY) and Circuit City were once profitable and safe investments.
Many investors held out hope that with some cost cutting and structural changes, those businesses could stay profitable. Of course, they could not, or at the very least, are hanging on by a thread.
Technology is continuing to evolve: Netflix (NFLX) and Amazon (AMZN) are seeing record numbers of subscribers for their TV/film services; and why bother picking up a physical copy of a game at a brick-and-mortar store when you can just download or stream a video game online?
Here’s a closer look at some companies who are going to see their business crumble before their very eyes as the competition dismantles them brick by sordid brick.
Stocks on the Wrong Side of Technology: Outerwall (OUTR)
For $1.50 to $2 per day, consumers can rent movies from Redbox kiosks owned by Outerwall (OUTR), which is where the company sees the vast majority of its revenue. Which is why OUTR should see NFLX as more of a threat than a bear in an Alejandro González Iñárritu movie.
The number of NFLX streaming subscribers in the U.S. has topped 40 million and is increasing by hundreds of thousands each and every quarter. Obviously, it’s super convenient to stream videos without the hassle of picking up a DVD at a kiosk and making sure to return it before you get charged for another day.
And although Redbox gets movies sooner than Netflix, the latter company has a bigger selection, and not many Netflix subscribers are going to want to pony up additional money for Redbox movies and deal with the hassle of going out to get movies and return them.
Outerwall’s results have reflected this trend for some time: As long ago as the third quarter of 2014, the company’s income from continuing operations sank a staggering 79% year over year and overall net income tumbled 78%. Although its revenue dropped “only” 5.7%, usually Wall Street punishes the stocks of companies whose businesses are in decline.
But through the magic of cost cutting and low interest loans, which it used to repurchase hundreds of thousands of its shares per quarter, along with occasionally blaming its troubles on weak film releases, OUTR somehow managed to keep the Street happy, sending OUTR shares up to a multi-year high of over $85 in July.
In the last couple of quarters, however, investors have finally begun to see that the emperor is not wearing clothes. In July, after OUTR reported higher than expected EPS, but said that its overall revenue fell 0.2% year-over-year to $545 million vs. the consensus estimate of $583 million, investors finally began to tire of Outerwall’s shell games.
That’s when the levees broke: The midpoint of the company’s full-year revenue guidance came in below expectations; it took a goodwill impairment charge of $86 million for its ecoATM cellphone recycling business; and it announced a new chief executive officer whose previous CEO stint lasted only six months.
Investors were not thrilled. OUTR stock dropped to $60 from around $70 before the results were announced.
Outerwall’s stock took a much worse hit of around 40% after the company cut its full-year EPS guidance to $7.65 to $8.15 from $8.82 to $9.52 on Dec. 7, and admitted that it had increased the discounts offered by Redbox. Moreover, on the same day OUTR announced that the head of Redbox had left the company. Although Outerwall again tried to blame its woes on poor movie releases, investors appear to have finally realized that its business is crippled.
OUTR may pull more tricks out of its hat that will produce a bounce or two going forward, but anyone who tries to catch this falling knife will regret that decision.
Stocks on the Wrong Side of Technology: Walmart (WMT)
Walmart (WMT) is facing extremely tough competition from an array of sources, including Amazon, whose sales are growing rapidly: its retail business soared to $15 billion in the third quarter, up from just $11.7 billion in the same period a year earlier.
Moreover, the online retail giant announced that it had sold an impressive 3 million new memberships to its Prime discount shipping service during the third week of December, indicating that its rapid sales growth is poised to continue.
Additionally, Amazon is launching/expanding rapid delivery services that should greatly accelerate its growth, making it a much more dangerous competitor for WMT going forward.
“With every passing year, it becomes harder and harder for Walmart to compete with Amazon,” RBC Capital analyst Mark Mahaney was quoted as saying in October by The New York Times.
Of course, WMT is also facing other powerful, expanding competitors. The dollar stores are quickly increasing their footprints, and Costco (COST) is growing quickly. Additionally, Business Insider quoted BMO Capital analyst Wayne Hood as saying Walmart’s key grocery business, which makes up 59% of its revenue, has been on the decline.
In the third quarter, Walmart’s total U.S. comp sales (including Sam’s Club stores) inched up 0.7% year-over-year, while the operating income of the flagship Walmart stores sank 8.6% in the U.S.
Given Walmart’s surging competition, the company’s comp sales will turn negative this year and its operating income should slide further as it offers more discounts and tries to enhance its e-commerce offerings in a desperate, futile effort to keep up with the competition.
As investors realize that Walmart’s operating metrics are tumbling further and will never recover, WMT stock — which fell from $85 to $61 over the course of 2015 — will drop much further.
Stocks on the Wrong Side of Technology: GameStop (GME)
The problem faced by video game retailer GameStop (GME) is simple — industry sales of physical video games, which account for most of its revenue, are sinking like a stone as consumers turn to the Internet to make their purchases.
Like Outerwall and Walmart, GameStop’s business is being sharply undermined by a more convenient, higher-tech sales outlet.
In November 2015, sales of physical video games dropped 7% against the same month in 2014. Meanwhile, global digital game sales rose 11% in September compared with 2014.
In general, “the popularity of digital games is increasing more quickly than expected earlier in the year, hurting GameStop,” Research firm Pacific Crest described GameStop’s business model as “seriously challenged,” recommending investors avoid the stock in the near and medium term.
GME has a substantial digital games business, which the retailer expected to generate $1 billion in revenue in 2015. However, as Fortune notes, “the lion’s share” of its revenue still comes from physical games. Moreover, GME appears to be deluding itself that video game sales will not suffer the same fate as other physical technologies.
“The market has seen physical music sales down 50% from its peak and physical movie sales down 60% from its peak, but even in a doomsday scenario, disc-based games will be around for a long time,” Fortune quoted GameStop CEO, Paul Raines as saying. “I see a complimentary business where we sell discs plus download like the current console mode,” he added.
Combining a relatively small digital business and a large, sinking physical games business, GameStop will actually suffer a sharp decline in its results and a complimentary plunge in GME stock.
Given the crippling higher-tech competition faced by OUTR, WMT and GME, investors should unload all stakes in those stocks.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
