Blockbuster (BBI) is taking on Netflix and the Street agrees

Today (6/13) Citigroup upgraded Blockbuster Inc (NYSE: BBI) to Buy from Hold based on valuation, improving box office visibility and their belief that the lower-priced online-only rental product will help improve costs. Wall Street is jumping up and down today sending Blockbuster shares up 9% and it's only going to get better.

Blockbuster just implemented their new unlimited three-DVDs-out-at-a-time plan at $16.99 -- $1 cheaper than Netflix's (NFLX) most popular plan. I think we've all had enough of the battle and comparison of Blockbuster versus Netflix but the new price cut clearly shows the winner is going to be Blockbuster.

It used to be everyone in America hated Blockbuster, how much have you paid in late fees to the corporate mammoth? Too much. But times change, and finally Blockbuster is changing for the benefit of its investors. You can't deny that Blockbuster is growing its subscribers faster than Netflix, no matter how many ads they send you in the mail and in your newspaper (those are so damn annoying).

Blockbuster had 3 million subscribers as of April 1, and projected on Tuesday that the online rental market would grow by 43% this year. Compare that to Netflix who in April reached 6.8 million subscribers but cut its year-end subscriber forecast to 7.3 million to 7.8 million from its January outlook of 8 million to 8.4 million.

Now you may fire back and say VOD is where the real growth is going to be, and both of these companies are going to lose out to Apple Inc. (AAPL) and Amazon.com (AMZN). People, that market is not large enough to take on BBI or NFLX, it's just starting out, and it's going to be years before Video-On-Demand kills a corporate giant like Blockbuster.

The digital age is upon us but the brick and motor DVD rental business via mail is still the industry leader and will continue to be for the next three to five years. Besides, I would never consider Blockbuster to be a long term hold, it's got 2 to 3 years left before it's game over. So with shares of Blockbuster trading at $4.31 despite moving 9 to 10% today, it's still got potential to get to $7 a share within the year.

Article written by: Eric Cheshier
Article posted on: June 13th 2007

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Disclaimer: The Author does not own any shares or positions in any of the securities mentioned in this publication.