Although markets in the US had a bad day on Monday, one of the stocks that opposed the trend was Redbox Entertainment (NASDAQ: RDBX). The video kiosk operator seems to be recruiting as the next big hit in the madness of memes. However, there are many reasons to be very negative for stocks, which in our opinion can lead to almost 100% decline in many scenarios.
Shares closed at $ 13.20 on Friday, but rose from $ 5 to more than $ 18 before retreating slightly on Monday. This seems to be a move based on a brief contraction, with shares making Reddit circles among the WallStreetBets crowd. As the chart below shows, short interest in the name has increased throughout 2022 so far, with more than 37.5% of float declining in late May, according to Morningstar.
One of the main reasons for the growing short interest this year is that the company agreed to merge with chicken soup for the entertainment of the soul (CSSE). Usually investors may think this is a good thing, as most of the time it means they can sell shares to another country at a higher price. However, this is definitely not the case here. As the article is related to the details above, the upcoming Redbox deal costs significantly less than the shares currently traded on the market:
Under the all-share transaction, Redbox shareholders will receive a fixed exchange rate of 0.087 per CSSE Class A share per ordinary Redbox share.
But the CSSE fell 2.2% on Monday to $ 8.57; his share price suggests acquiring Redbox for about 75 cents a share.
There are probably a lot of merger arbitrage people tearing up the name at these levels in teens, hoping that the shares will eventually fall to a default price of less than a dollar a share. Maybe at some point a revised deal happens, but even if it comes to, say, tripling the current share price, it’s just over $ 2 per share. However, even if the deal is not made, it is not a business that is currently in good shape. See the table of key financial indicators below.
Renting movies was a great business a decade ago, when it was the bulk of the business for a name like Netflix (NFLX). Since then, however, Netflix has turned to streaming, and Amazon (AMZN), Apple (AAPL) and others have poured billions into new and old content. Each passing month simply adds more users to the overall streaming space, with the number of people relying on renting DVDs and Blu-Ray discs declining.
If big losses and burning money aren’t enough to worry you, maybe the balance in Redbox will. According to the latest submission for the 10th quarter, total assets are just over $ 361 million as of March 31. However, just over 70% of this is actually in the category of reputation or intangible assets. The company reported cash for less than $ 14 million, while total debt was nearly $ 343 million. As the financial situation continues to weaken and global interest rates rise, borrowing costs will only increase, which will further damage the end result and the cash flow situation. Bankruptcy may be an option in the long run if the merger does not take place.
Ultimately, Redbox Entertainment investors must use a rally like the one seen on Monday to sell the shares. The company is currently under a merger agreement that values the shares at less than $ 1 per share, which implies a huge drop from here. However, even if the deal is not made, it is a business that shows a huge drop in revenue, large losses and significant money burning. Redbox may be a favorite of the Reddit crowd right now, but like AMC (AMC), GameStop (GME) and others before it, stocks are likely to return to a more appropriate rating that is much lower than what it is. we are today.