Five Reasons to Sell Coinstar, Inc. (CSTR)

Specialty retailer and kiosk operator, Coinstar, Inc. (NASDAQ:CSTR) seems to be growing despite a lot of naysayers. The company showed healthy increases in its top line and bottom line, and has manageable debt levels. The company has a sizable repurchase program in place. Yet, the company is a heavily shorted one with close to half of its outstanding float being sold short. However, before buying into the Coinstar, Inc. (NASDAQ:CSTR) story, investors should carefully evaluate some of the reasons why the short-sellers might be right.

1. Trend towards “over the top”

Consumers are increasingly turning towards online media consumption, and shying away from physical DVDs for watching movies and other video content. However, Coinstar, Inc. (NASDAQ:CSTR) has diversified its product offerings in the kiosks by offering Blu-ray discs as well as video games.  And also, the company’s partnership with Verizon Communications Inc. (NYSE:VZ) for launching Redbox Instant, is a step in the right direction.

But the Internet streaming business is turning out to be extremely competitive, with some companies spending billions on acquiring new content, and getting subscribers. The category leader in the online streaming space, Netflix, Inc. (NASDAQ:NFLX), as well as other leading competitors like Amazon.com, Inc. (NASDAQ:AMZN) and Hulu have gained strong traction in adding new subscribers. Netflix, Inc. (NASDAQ:NFLX) now has more than 33 million unique subscribers, and has a massive content library of more than 60,000 titles. Also, almost all the leading companies in the space are heavily investing in adding original shows to their library.

Redbox Instant by Verizon Communications Inc. (NYSE:VZ) has a small library of roughly 4600 titles, and will not be adding original shows in the near term either, but will be providing 4 redeemable DVDs at kiosks. As a result, the joint venture between Verizon and Coinstar, Inc. (NASDAQ:CSTR), will have a difficult time gaining widespread consumer acceptance. However, Verizon Communications Inc. (NYSE:VZ) has a strong presence in the video-on-demand space, and might be able to aid in bagging a decent amount of subscribers. But over time, competition is expected to intensify even more in the Internet TV space.

2. Content from movie studios

Coinstar, Inc. (NASDAQ:CSTR) gets its content from many movie studios and video game publishers. The company has entered into licenses with some studios to acquire DVDs by the “street date” i.e. on first date, on which movie studios release their DVDs for at home entertainment for rentals or sales. And also other arrangements with other studios will enable the company to receive DVDs for rent after 28 or more days after the DVD gets released.

As users of Redbox often frequent the kiosks for getting new release movies at a reasonable price, delayed content from movie studios will impact its reputation as well as revenues negatively.