Is Blockbuster going the way of the VHS?
Today's Financial News - Posted May 15, 2009
The movie rental industry is in trouble. Blockbuster is in the headlines today as its shares fall by as much as 30%. Is a bankruptcy filing in the cards?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): I watch about one movie each month, if I am lucky, and most of those are borrowed from a friend or relative’s Netflix (NASDAQ:NFLX) account. So it is safe to say Blockbuster (NYSE:BBI) is not getting any money from me… and neither is Netflix.
Looking at Blockbuster’s latest earnings report, it is not getting much money from anybody.
The year’s first quarter was far from a good one for the movie-rental business. Blockbuster claims its drop in sales was due to a lack of good movies reaching the rental market and the closing of some stores, but more likely it is a lack of a good business model that is driving the company slowly but surely towards bankruptcy.
Over the last three months, Blockbuster watched its profits decline by 39%, down to just $27.7 million on $1.12 billion in revenues.
If the current trend continues, Blockbuster will not be in the black – and quite possibly, in business – for much longer.
Out of all the figures the company released last night, the most foretelling is the horrific drop in same-store sales. Thanks to a host of negative factors, sales dropped by 10.9% at stores open for more than 12 months. This time last year, the figure was an increase of 2.9%.
That’s not good.
It should be obvious to shareholders that the news is bad, but just in case they misread the earnings report, one glance at today’s share price action should tell them something is horrifically wrong.
Is this flick a drama or a comedy?
Shares of Blockbuster traded down by as much as 30% today.
Could the selling activity be in anticipation of a future bankruptcy filing?
While it is still too early to say for certain that the rental company is gearing up for a day in court, anybody with a crystal ball or a set of tarot cards would say a filing appears inevitable.
It may not happen this year or next, but it likely will happen someday in the relatively near future.
Blockbuster simply has not found a solution to competitors like Netflix and online offerings. Yes, the company has its own mail-based service and offers movies on the Internet, but we all know how fickle Web surfers can be.
If a company is unable to be a first mover online, it is likely to never get the kind of momentum it needs to overcome its competitors. Unless Blockbuster can somehow find the capital it needs for an all-out media blitz and a full-on re-launch of its name, its solvency will remain a high concern for investors.
If you are looking for a way to play this situation, take a look at going short on Netflix. Surprisingly enough, it has its own set of pains.
Netflix may be the industry leader, but it is not immune to some of the fundamental problems facing its competition. In the next six months or so, its correlation with Blockbuster will increase, meaning its share price will drop.
Shares of Netflix have remained strong and are in positive territory based on the bad news from Blockbuster. By almost all standards of valuation, Netflix is overvalued.
Go short and wait for the hype to dwindle. As consumers continue to cut their expenses, Netflix subscriptions will be hurt.
Blockbuster is hurting and is likely in serious trouble. Its pain is a symptom of the dire illness overtaking the entire industry.
Next Article: Another profit opportunity is starting to build
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May 16th, 2009 at 12:52 pm
The question is how large an effect will the technology have on the marketplace?
That’s the tricky part. Some industries (like radio vs. tv) keep going & others are replaced instantly…
What will happen to Blockbuster, who knows?