Blockbuster Miscalculated
Below is a MRR and PLR article in category Finance -> subcategory Stock Market.
Blockbuster's Misstep
Summary: Blockbuster serves as a cautionary tale of what can go wrong when a company fails to adapt to industry changes and then scrambles to recover.
Blockbuster once dominated the video rental market, with shares reaching nearly $30 and a market cap of $5.75 billion from late 2001 to 2002. However, the company overlooked the growing trend of online movie rentals, a critical error that led to its decline.
Currently trading between $3.80 and $4.20, Blockbuster, now a small-cap company, struggles to find direction. Although it has entered the online DVD rental space, it's far behind its competitors. Over the last three quarters, Blockbuster has consistently lost money and battles to increase its revenues, which are projected to grow just 1.1% in fiscal 2006. With an estimated five-year earnings growth rate of only 2.5%, its future looks bleak.
Additionally, Blockbuster is burdened with $1.27 billion in debt and a debt-to-equity ratio of 2.73:1, indicating a weak financial position. The challenges of stagnant growth and financial instability make it difficult for Blockbuster to reclaim its former success.
In contrast, Netflix emerged as a major player in online DVD rentals, predicting the shift from physical stores to online platforms. While Blockbuster stuck to its traditional model, Netflix flourished, becoming profitable for three consecutive quarters and boasting 4.2 million subscribers. With a projected 32.5% revenue increase in fiscal 2007, Netflix's growth far outpaces Blockbuster's.
Although Blockbuster has launched its own online rental service, it lags behind Netflix, which even took over operations for Walmart’s online DVD business after Walmart discontinued the service.
Netflix’s shares trade at 36.73 times its estimated FY06 EPS. However, if Netflix continues its growth trajectory and hits the projected $1.11 per share for FY07, its valuation becomes more justifiable. The company faces significant pressure to deliver but remains on the right path.
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