Blockbuster Inc.
(NYSE: BBI) shares fell sharply today despite announcing strong results
proving that it can still compete against online video rental and
streaming online video services. The movie rental chain announced in
its latest 10-K annual report
that its fourth quarter profits grew by 360 percent on the heels of
aggressive cost-cutting and the repositioning of some of its
subscription offerings. The stock price quickly jumped 3.4 percent in
morning trading before investors began to realize that actual revenue
increases amounted to just four percent growth year over year. So, can
Blockbuster compete or will it eventually face reality?
The market for video rentals is a quickly changing one that many are
struggling to grapple. DVD rentals themselves continue to grow as
Americans spent some $7.5 billion in 2006, but growth flattened in 2007
thanks to the rise of online downloads and video-on-demand services
offered by cable providers. Meanwhile, Netflix (NDAQ: NFLX) has proven
to a more near-term threat that has also taken a large part of the
company’s market share over the year. Combined, these revelations
caused Blockbuster shares to halve last year to around $3 per share
where it has remained until now.
Blockbuster does have a secret weapon, however, in the form of its
subsidiary Movielink. The online movie download service was formed in
2002 by a group of major movie studios including MGM Studios, Paramount
Pictures, Sony Pictures, Universal Studios, and Warner Bros who spent a
reported $100 million building the service that has yet to hit the
mainstream. Blockbuster purchased the chain for $6.6 million in cash
and it positioned the company to leverage its existing infrastructure
to promote a new service that is well connected in the sue-happy movie
industry. The service provides the company with the infrastructure for
digital downloads and provides it with the digital rights to more than
6,000 films.
Blockbuster has also taken action to improve its current operations.
Recently, the company introduced its five-point distribution system
that allows customers to rent movies in stores, by mail, via online
downloads, in DVD kiosks, and through flash memory cards. Meanwhile,
the company also managed to substantially cut its costs, which has
directly helped increase its profits and bottom line. Combined, this
has many analysts predicting that the company will likely perform well
in FY2007 and guide fairly bullishly for 2008. As a result, this is
definitely a stock that is worth watching at these cheap levels!
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