If you have rented a DVD at a grocery store recently, the little red box was probably one owned by Coinstar (Nasdaq:CSTR). Coinstar first introduced the now famous green coin counting machines often found at the nation's major grocery chains. It's the same company behind the rapidly growing and widely successful "RedBox" DVD rental kiosks.

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A Game Changer
Coinstar's RedBox machines are changing the way consumers rent movies. The machines offer $1 DVD rentals per night. This is much more economical than retail video rental giant Blockbuster, which offers $5 movie rentals for five days. People have no need for a five-night rental; the Redbox turns the traditional retail video rental model upside down.

Coinstar, along with online rental giant Netflix (Nasdaq:NFLX) have made it virtually impossible for traditional big box movie rental chains to compete. Instead of a physical retail location, a RedBox is a Coke machine-sized video rental store that can be located anywhere and are found at Wal-Mart (NYSE:WMT) and even McDonald's (NYSE:MCD).

At a grocery store, shoppers can now pick up dinner and a movie without having to go to separate location. And at just $1 dollar, no other movie rental costs less. According to Barron's, Coinstar's machines now account for 25% of all DVD rental volume, easily surpassing Blockbuster.

Are Shares Cheap?
With only 27,000 DVD rental kiosks, Coinstar has lots of room to grow its popular machines. There are over 30,000 McDonald's locations alone, not to mention the tens of thousands of grocery stores and other qualifying retailers. According to Barron's, the company will add 8,000 kiosks in 2010 alone.

DVD rental revenues are estimated to exceed $1 billion this year alone. Since the RedBox kiosks came out, this $1 billion milestone was achieved quicker than Netflix. With a market cap of $1.5 billion and a P/E of 21, Coinstar shares are not cheap. Yet many can make a valid argument that the potential future growth of RedBox makes Coinstar an attractive growth at a reasonable price company. Indeed with a forward P/E of under 16, the stock price doesn't look grossly overvalued. By comparison, Netflix trades at over 50 times current earnings and 30 forward earnings, respectively.

A Delicate Decision
While it might not be a good idea to bet against Coinstar today, the immense success of RedBox may likely invite competition in the very near term. Even if it does, RedBox clearly has a leg up with the popularity of RedBox today. Any opportunity to buy on dips may be the better at this point. Of course this means risking the possibility of waiting forever if the share price continues to climb. (For related reading, take a look at Is Growth Always A Good Thing?)

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