Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Crazy Stocks

Is Redbox Doomed, or Is It a Great Contrarian Investment?

Contrarian investors make their money by ignoring conventional wisdom and popular opinion and basing their stock picks on the actual financial numbers. Successful contrarians look for those stocks that conventional wisdom say are doomed but are actually making money.

A prime example of such a stock right now is Outerwall (NASDAQ: OUTR), the company that owns and operates the Redbox DVD rental machines found outside almost every supermarket and drug store in the United States. Conventional wisdom tells us that Outerwall is doomed because of the growing popularity of streaming video.

Yet the financial numbers show us that Outerwall is still making money and paying off for investors. A lot of people are still renting videos from the Redbox machines, as most supermarket customers probably realize.

Redbox Is Making Money

Outerwall’s numbers for fourth quarter 2015 show us that Redbox is still a very profitable business. More importantly, they show it will be such for the foreseeable future.


Some of the highlights of Outerwall’s numbers from December 31, 2015, include the following:

  • Revenues of $2.193 billion


  • A diluted earnings per share ratio of 2.664


  • A net income of $44.34 million


  • A profit margin of 3.23%


  • A free cash flow of $41.88 million


  • A market capitalization of $528.33 million


  • An enterprise value of $1.252 billion


  • A return on equity of 116.6%


  • $222.55 million in cash and short-term investments


  • $326.08 million cash from operations


As you can see, Outerwall is a pretty good investment right now. It is undervalued, but it is making money. More importantly, it is generating a pretty impressive profit and cash flow from its business.

The company also has some pretty nice assets that are worth around $1.366 billion, although its liabilities of $1.388 billion slightly exceed the value of the assets. This puts the company on the brink but shows it is a viable business and a decent if risky value play as stocks go.

Redbox Is still a Very Viable Business Model

Even though it is in a declining industry, Redbox is still a very viable business with a strong brand. The company has vending machines at 33,000 locations in the United States.

Its boxes can be found at some of the biggest names in American retail, including Walmart; the nation’s largest grocer, Kroger; the largest drugstore chain, Walgreens; and the 7-Eleven convenience stores. The business model is a very simple one that definitely fits Warren Buffett’s criteria of an enterprise so simple any idiot could run it.


Each Redbox machine is stocked with videos that rent for $1.50 a day. The videos are a mix of new releases and recent titles that are available 28 days after DVD release. Despite its low-tech approach, Redbox is still the cheapest place in town to rent recently released videos. Streaming services such as Amazon and Netflix generally charge between $6 and $7 for recent releases.

The problem is that demand for Redbox’s rental volume is falling off. The service’s usage peaked at 772.9 million in 2013 and fell to 717.1 million in 2014 and 587.6 million in 2015, Variety reported. This affected Outerwall’s revenue, which fell from $2.292 billion in December 2014 to $2.193 billion in December 2015.

The company’s cash from operations fell slightly as well, decreasing from $338.35 million to $326.08 million between December 2014 and December 2015. A more worrying number for investors should be the drop in cash flow over 2015. Outerwall’s cash from operations rose to $398.08 million in September then fell to $326.08 million in December. That’s a decline of $72 million in just three months.

A Good Business with a Questionable Future

This indicates that Outerwall is a good business with a strong brand that has a very questionable future. The danger here is that the company has not developed any streams of income to replace the video revenue.

Outerwall needs to find something else to sell or rent through the Redbox machines. Perhaps it could sell books, magazines, comic books, toys or burner phones and place them in there now while customers are used to going to the locations. Another product it could test might be prepaid credit cards or phone service. Adding traditional vending machine items such as soda, candy, snack food and possibly vitamins or even fresh fruit or sandwiches could generate additional revenue.

A major problem is that unlike people in China or Japan, Americans are not used to buying that much from vending machines beyond soda pop, chips and candy. Outerwall and its competitors have done little to change that even though there is an opportunity here.

After all, Outerwall does have prime locations outside some of America’s top retailers. Obviously, it would have to find products that do not compete with the stores’ merchandise, but it could be done.

Is Apple Pay Redbox’s Future?

One major opportunity that could be to Outerwall’s benefit is the rise of phone payment solutions such as Apple Pay, Android Pay, Chase Pay, Current C and Walmart Pay. These could make it easier to sell higher priced items through vending machines because it will be easier to use credit or debit cards to pay at the machine.

There are vending machines in Japan that sell umbrellas, toasted sandwiches, frozen food, toys, clothing, batteries and even women’s underwear. Surely there has to be some products Outerwall can add to the Redbox machines. Items of clothing such as gloves and hats might be a good place to start. So might car or phone accessories.

Since there are already machines in China that can be used with payment apps and some Coca Cola vending machines in the United States that take Apple Pay, it seems like a natural fit.

Outerwall could be an interesting contrarian opportunity. It still has a good business; its revenue shows that there are vast numbers of people still renting its videos, which guarantees cash flow for the foreseeable future. More importantly, it has some assets and expertise that a creative management team could capitalize upon to develop new sources of revenue.

If you’re looking for a good contrarian stock pick, Outerwall is certainly worth a look. It is undervalued, but it still pays off for shareholders.