An Alternative to the Invincible (and Extremely Pricey) Netflix

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I could sit here all day and write about all the reasons I would not buy Netflix (Nasdaq: NFLX  ) right now after its massive 220% run this year to all-time highs -- in fact, I did highlight some of the reasons here. It's simply not part of my investment style to buy stocks that trade at more than 48 times book value and at an EV/EBITDA of 31.3. Just for reference, Apple (Nasdaq: AAPL  ) trades at 6.5 times book value and with a 13.4 EV/EBITDA.

At the end of the day, it's important as an investor to not be emotionally involved in how a stock performs. In situations like this I like to look at other companies that provide some of the same services that may fit my investment style better.

Physical distribution still strong
The physical distribution of DVDs and other entertainment is not exactly going to go away anytime soon, and NCR (NYSE: NCR  ) is in a strong position to serve this market. The company, long known for its ATM machine expertise, has pushed into the rental kiosk business. Despite the rise of digitally distributed media content, physical DVDs are still an important market -- totaling nearly $8 billion a year in sales and rentals.

Best of all, NCR has essentially become Blockbuster, except without the expensive retail locations or any other significant costs besides its kiosk installation and DVD purchases. The DVD kiosk market is expected to grow by 37% this year, and the company's marketing and licensing deal allows NCR to brand the company's 5,000-plus DVD kiosks with the well-known Blockbuster name. Physical DVD distribution is still a very small part of NCR's revenues, so there is room for plenty of growth despite the decline of physical media, especially if the kiosks rental market hits the $2-billion-a-year mark by 2014, as predicted by Adams Research.

NCR is also planning on joining the digital revolution. The company has partnered with InMotion entertainment and will be installing kiosks in airports across the United States. Travelers will be able to download movies, e-books, music, and other digital media to their personal devices. NCR will look to expand its offerings to other kiosks in time. Coinstar's (Nasdaq: CSTR  ) Redbox is NCR's main competitor in this space, and it also plans on entering the streaming video market.

The core business
While the entertainment business will provide a new revenue stream for NCR, what I like most about the company is its ATM business. NCR is the world's largest maker of ATMs, and its machines are used by 19 of the 20 largest banks. What sets NCR apart from competitors is its ability to service banks as more than just a provider of ATMs. Customers now expect to be able to do their banking by using their smartphone, the Internet, or an off-site ATM without ever having to step foot in a bank. NCR CEO Bill Nuti spoke about this on the most recent conference call as "multi-channel self service." He also referred to the head of Wells' ATM Banking business, Jonathan Velline, who said, "NCR has a lot of technical know-how. They've been in this business forever, and they are good at taking on a technical challenge."

ATM growth in the United States is not as rapid as it once was, especially with the troubles of the financial sector over the past few years. However, emerging-market ATM growth has been exponential. For example, at the end of 2009 there were 210,000 ATMs in China. By 2015, that number is expected to grow 160%, to 545,000 ATMs. NCR is also expanding rapidly in Brazil, India, and Russia. Nuti believes double-digit growth in these countries will continue in the coming years.

NCR's Brazil operations are bolstered by its manufacturing presence in the region. As a result the company has been able to achieve a significant cost advantage over competitors. As Brazil continues its infrastructure build-out for the 2014 World Cup and 2016 Olympic Games, demand for ATMs should remain high.

One more thing
NCR is also the global leader in self-checkout systems that are starting to pop up at retailers all over the world. The company's self-checkout units are now in 21 countries and encompass 12 different business segments. The company's customer list is impressive, including such large retail names as Home Depot (NYSE: HD  ) , Lowe's (NYSE: LOW  ) , and Wal-Mart (NYSE: WMT  ) . NCR supplies all of these stores with self-checkout, as well as point-of-sale systems.  In addition, if you have ever checked in for a flight at a self-serve kiosk, it was likely made by NCR, as the majority of the major airlines use NCR systems.

So, take that, Netflix bulls!

If you can't get excited about Netflix, look into taking NCR to the self-checkout line. NCR has a solid, stable product line of ATMs with some great growth opportunities mixed in.  

Andrew Bond owns no shares in the companies listed. Apple and Netflix are Motley Fool Stock Advisor recommendations. Lowe's Companies, Wal-Mart, and Home Depot are Motley Fool Inside Value selection. The Fool owns shares of Lowe's, Apple, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2010, at 7:51 PM, feldmail wrote:

    While I can see your point for NCR on the basis of the ATM and self-service checkout business, I cannot understand the DVD portion. A lot of hype has been surrounding these DVD kiosks. Coinstar's Redbox has been expanding like crazy. They now have the market over-saturated with nearly 3 Redbox kiosks for every 1 McDonalds in America! The fact is that the market for physical disks is shrinking. Netflix has shipped 26% less physical disks per subscriber over the previous year. Also, whether you like Netflix or not, their nearly 20M subscribers(projected year-end number) are now 20M families that will not rent from kiosks.

    Also, VOD now is appearing day-and-date, while most physical rentals are delayed 28 days. This has only recently occurred and is going to hammer the kiosk business. The future of the movie rental business is digital. While some amount of physical disks will be around for quite a few more years, the addressable market is undergoing rapid erosion. I would never invest into a shrinking addressable market. As to digital plans by both NCR and Coinstar, I don't see these as competing with the established players in those markets.

  • Report this Comment On October 28, 2010, at 1:18 AM, foolishkids wrote:

    Netflix delivers an outstanding service. My daughter has loaded Netflix on her Ipod touch and she can see her movies while others are watching different movies on the TV set, all streamed by Netflix. No interruptions, pauses, or downtime. We do get DVDs from time to time but there is plenty to watch from Netfilx's on-line movie selections. I have direct TV and Netflix compliments it beautifully. Partnerships such as one suggested between Amazon and Redbox though jazzy may not succeed. Amazon is known for selling books and Redbox is new in DVD renting. Netflix has a business model that fits DVD renting and streaming videos. As they add more customers and reduce their costs, their profits would go up. At this time, the PE does not matter as Netflix is on a fast growth path. It has already built the momentum necessary to become a formidable media company worth several times its current valuations.

  • Report this Comment On October 28, 2010, at 12:31 PM, frankzen wrote:

    So... do you enjoy missing out on money or something?

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