10-Minute Investment Autopsy No. 16: Blockbuster
Cheap + bad still equals bad
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: Arne Alsin
When: November 2005
What: Blockbuster (ticker: BBI)
The Thesis:
There is a lot of negative in the market outlining reasons why Blockbuster is going away
Arne is convinced there is still a demand segment the company can serve
Blockbuster took a $550m hit to revenues by ending their late fees in 2004. If you back that out, the company grew its revenues despite threats from Netflix, video on demand and DVD sales
They have a vibrant retail business selling videogames and DVDs, which was about a third of revenues and grew 15% last year
They also have an online business that has more than 1M subscribers and is expected to grow to 2M by the end of 2006.
Blockbuster has an opportunity to right-size its operating structure
The argument that Blockbuster is going to die is suspicious because 1) everyone is saying it and 2) it ignores unexpected positive surprises the company can deliver as they reinvent themselves
They have a well-known retail franchise that gives them opportunities to provide new offerings to consumers
The stock is very cheap, trading at less than 40% of sales of just the video game and DVD retail segment alone
These are the highlights of Blockbuster’s then-recent financials up to the point when Arne was presenting his thesis:
This is the stock chart up to the time when Arne presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Blockbuster shareholders lost all of their money as the company filed for bankruptcy in 2010
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread