After Surging More Than 200% in the Past Month, is Redbox Still a Buy?

Redbox Entertainment Inc. (RDBX) in New York City operates a network of more than 38,000 self-service kiosks across the United States, wherein customers can rent or purchase DVDs or Blu-ray discs. It also operates a…

film distribution label subsidiary Redbox Entertainment, LLC, ad-supported transaction service Redbox Free On Demand, and ad-supported television service Redbox Free Live TV, among others.

RDBX went public through a reverse merger on Oct. 25, 2021, with blank-check company Seaport Global Acquisition Corp. The merged company had an enterprise value of $693 million. RDBX raised $209 million in cash from the business combination, which it planned to use to reduce existing debt and fund business expansion, content acquisition, and marketing initiatives.

However, RDBX stock has declined 48.4% in price since its stock market debut. Nevertheless, the company’s shares have gained 211% over the past month amid increased retail investor attention. In fact, meme investors are betting on RDBX as “the ultimate penny stock squeeze play.”

Here is what could shape RDBX’s performance in the near term:

Poor Financials

For the year ended Dec. 31, 2021, RDBX’s revenues declined 47.2% year-over-year to $288.54 million. Its gross margin came in at $173.40 million, down 46.7% from the same period last year. Its adjusted EBITDA loss amounted to $15.15 million, compared to a $113.78 million profit reported in the prior year. Also, its loss before taxes and net loss worsened 84.6% and 102.5% from the year-ago values to $174.79 million and $140.76 million, respectively.

Doubt Regarding Going Concern Operations

RDBX’s business was adversely impacted by the COVID-19 pandemic last year and further exacerbated by the spread of the Omicron variant. RDBX’s retail footprint declined slightly in its fiscal 2021. Its total number of locations fell 3.2% year-over-year to 32,586 as of Dec. 31, 2021. Furthermore, its  total number of kiosks fell 4.3% from the same period last year to 38,379.

RDBX’s history of recurring losses, accumulated deficit, and negative working capital has caused management to raise substantial doubt over the company’s ability to continue operating as a going concern. Given its poor cash flows and negative profit margins, RDBX might find it difficult to raise additional capital to finance its operations or refinance its corporate debt.

Potential Short Squeeze

Since mid-March, investors have been heavily shorting RDBX. As of April 15, 1.20 million RDBX shares have been sold short, marking a…

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