Blockbuster (NYSE: BBI) is dying and will bleed out soon. The question isn’t if – it’s when.
The company's eponymous blue-and-yellow video stores are hopelessly stuck in the past. The brick-and-mortar model of video rental has been overtaken by superior technologies that are far more convenient and customer-focused. Video rental is now available on the Internet, via set-top cable boxes and through the mail. Blockbuster doesn't have a meaningful stake in any of those channels. And the number of customers willing to drive to its 7,400 stores is dwindling fast.
So is Blockbuster's market cap, which is nearly invisible to the naked eye. Its shares are worth $130 million, a fraction of the $2.6 billion Netflix (Nasdaq: NFLX) is worth. Blockbuster's sales have been trending down for the past five years. Last year's $5.2 billion revenue was -13% below year-ago levels.
Lots of companies can stave off falling revenue with smart, lean management. But not Blockbuster, which hasn't been able to turn a profit even in the best of times. The company has ended in the red in nine of the past ten years, losing a total of -$5.22 billion on $54.2 billion in revenue. On a percentage basis, that's three times worse than General Motors!
It gets worse.
Blockbuster's balance sheet is in as bad a shape as its income statement. Shareholder equity -- the difference between what a company owns and owes -- has gone from $6.1 billion in 1999 to $214 million. The company is carrying $1.94 billion in debt, at least $430 million of which must be paid this year. And there's only $155 million in the till.
No company can bleed cash forever. Blockbuster knows this. In March, it hired the law firm Kirkland & Ellis to evaluate restructuring options. Shares nosedived -77% on the news, from $0.96 at the opening bell to $0.22 -- when the exchange halted trading. The company said it did not intend to file for bankruptcy, only for “refinancing and capital raising initiatives.”
But if Blockbuster was interested in analyzing their financial situation, they could have just hired accountants. If they wanted advice, they could have hired consultants. No one hires lawyers unless they're headed for court, or worried they might be.
On top of an outmoded business model and a lousy balance sheet, Blockbuster also has to battle against Netflix, its fierce upstart rival. Netflix, which pioneered DVD rental by mail, has become such a part of the culture that it's a verb. Investors value Netflix at 30 times earnings, and for the same reason that any company trades at such a rich valuation: Investors expect the growth to continue. They have good reason to: The past ten years' chart shows steady increases in both revenue and profits.
Netflix's total return trounces Blockbuster’s. Since 2002, while Netflix’s returns were soaring, Blockbuster’s did nothing but run further into the ground. Netflix is up +93% for the past five years. Blockbuster has lost -95%.
Even at its current price of 68 cents a share, Blockbuster is massively overvalued. It's a great short, and it will be right up to the point it takes refuge in bankruptcy court and the shares are rendered worthless. In a final twist of irony, the court clerk should charge Blockbuster a late fee. The filing, after all, is long overdue.