Coinstar Misses, What to Do Now

Coinstar (Nasdaq: CSTR  ) disappointed analysts yesterday with its second-quarter revenue and third-quarter projections. Company revenue came in at $342.4 million for the second quarter, below the average analyst prediction of $381.5 million. And Coinstar forecast adjusted income from $0.46 to $0.52 per share for the third quarter, well below analyst expectations of $0.60 per share. However, analyst forecasts include expected revenue from Coinstar’s money transfer business, which the company recently announced it plans to sell. Money transfer business unit revenue was excluded from Coinstar’s Q3 guidance. In intraday trading early this afternoon, Coinstar share are down about 8%. 

Last week, Netflix (Nasdaq: NFLX  ) also disappointed Wall Street despite great earnings when they reported a decline in average revenue per subscriber. Some investors viewed this as a positive sign for Coinstar's business model, which doesn't require a subscription fee, overnight delivery, or the overhead associated with Blockbuster's brick-and-mortar retail stores. 

Coinstar's miss suggests that it is not getting the benefit from the decline in Blockbuster and MovieGallery that the company expected. So, how can Coinstar regain its mojo as an impulse-shopper alternative to the subscription Netflix model? In a recent Bloomberg article, Ralph Schackart, analyst at William Blair & Co., speculated that Coinstar may need to compete with Netflix in the digital streaming market. Schackart speculates that Coinstar might work with Sonic Solutions (Nasdaq: SNIC  ) to provide streaming video. It will be interesting to see if things play out as Schackart expects and what type of pricing strategy Coinstar might adopt for streaming video to offset the costs of operating the platform with a partner like Sonic Solutions.

Is Wall Street over-reacting and is now a good buying opportunity? Or are Coinstar's revised forecasts a good reason to stay away from this stock? We looked to Motley Fool CAPS contributor icu81mi to weigh in on what the earnings miss means for Coinstar:

Today's sell-off was underdone if you ask me. This is one valuation that I just can't wrap my head around. A 25 P/E for a company that rents out movies on a dying format for a dollar a day? No, just no. There is absolutely not enough growth in that model to sustain to sustain this kind of multiple, not to mention all the debt they're taking on to fuel their expansion. Coinstar knows this too so they throw out "teasers" every once in a while about a possible streaming service to boost sentiment. Think about it. Even if streaming did somehow fit into Coinstar's model which it doesn't, what are the chances they can take any significant market share away from Netflix who utterly dominates that niche? The only thing I can see giving Coinstar a boost in the coming months is if Blockbuster ceases operations permanently in which case I would have to reevaluate.

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