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Coinstar - The Netflix Investment Alternative

Stocks in this article: NFLX CSTR

NEW YORK ( TheStreet) -- In breaking out its DVD subscriber base, Netflix (NFLX) revealed a possible investment alternative.

As Netflix takes a bloodbath following its disappointing third-quarter report, pay attention to Coinstar (CSTR), said Wedbush analyst Michael Pachter.

Amid the headline metrics of domestic subscribers and a potential loss in 2012, Netflix also decided to break out for the first time the financials of its DVD and streaming business.

The company ended the third quarter with 13.9 million DVD-by-mail users and foresees further cancellation among these users, expecting to end the fourth quarter with 10.3 million to 11.3 million DVD subscribers.

"Our weekly rate of DVD cancellation is steadily shrinking, as the price effect washes through, and in future quarters we expect DVD subscriptions to shrink modestly," CEO Reed Hastings said in a letter to shareholders. "We don't anticipate any additional material investment in equipment or other PP&E and a majority of our DVD library is fully depreciated ..."

This means there could be more than 2 million displaced DVD subscribers come December, which could present a huge opportunity for Coinstar's Redbox DVD kiosks.

The company rents DVDs for about $1 per night (though it is testing slightly higher prices in select markets). While its catalog of movies isn't vast, it has a chunk of new releases and family-friendly films.

Wall Street has been so focused on streaming competition it has failed to acknowledge that a substantial base of customers still watch video via a disc. Yes, the longevity of this format is questionable, but these customers in the near-term still need someplace to rent a movie from on a Saturday night.

Redbox certainly won't kill Netflix, but it will provide a refuge for its displaced customers.

Coinstar is scheduled to report third-quarter earnings on Thursday and Wall Street is calling for a profit of 88 cents ashare on revenue of $461.8 million. Shares of Coinstar have decreased about 5% since July.

- Reported by Jeanine Poggi in New York.

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