It's more than interesting to note that Coinstar (NASDAQ: CSTR), one of Netflix's rivals, perfectly understands that expenses for the purchase of a DVD library should be recorded in the operating section. In its most recent quarterly report, Coinstar reported the expenses of its DVD library under 'Cash flow from operating activities,' just as they should be recorded. Perhaps this explains why the darling of the video-rental world trades at an insane P/E of 570x and P/B of 2.6x, while Coinstar, its modest rival, trades at a P/E of 10 and P/B of 0.7. At these prices, Coinstar is well inside the value zone. The difference is even more striking when you consider the fact that Netflix's profit margin is a paltry 0.5%, while Coinstar shines with a profit margin of 8%.
I am currently struck with the extreme contrast between NFLX and CSTR - it appears that CSTR is much more attractive as a value bet than NFLX as a momentum/euphoria gamble, and there are lots of solid reasons. I still prefer value investing math and analysis versus runaway trains that can come to a screeching halt when they crash. Also, there are some rumblings about accounting irregularities at NFLX that need to be looked into, as well as the shareholder lawsuits at NFLX. CSTR was so candid in their last guidance that I was a not happy with them for being so forthcoming, but as an investor, their candor gave me confidence to invest now considering that my read of the financials suggests that the rest of the year could be strong after a flat first quarter which is already predicted. So if CSTR drops when the predicted flat earnings come out for this quarter, I will be a buyer on weakness because the rest of the year actually looks pretty good.