$RDBX - If QR Codes can make a comeback, why not Redbox?

9 mai 2022

Redbox Entertainment Inc. (NASDAQ: RDBX) a household name known for its DVD rental kiosks is transitioning into the digital space. Following its SPAC deal in October, Redbox stock has been in for a rough ride resulting in increasing short interest. However, RDBX stock has seen a turnaround in recent weeks thanks to the short squeeze effort orchestrated by retail investors hoping to replicate the epic AMC or GME short squeezes of the not so distant past. Increasing roughly 225% at the end of April, RDBX stock hit $11 before receding slightly.

Now trading at $6.14, RDBX stock is leading the Fintel Leaderboard for short squeeze potential and could see a second wave depending on momentum this week.

Fundamental Analysis
Most experts agree that RDBX’s business model as a traditional brick and mortar DVD rental provider is dying out, which has led the company to enter the competitive sphere of digital streaming by launching its own service. While this decision has made RDBX the target of increasing short interest, its transformation into a multi-faceted digital entertainment company could be the company’s best chance to save its brand.

After entering the market through a SPAC deal in October, Redbox stock quickly dropped from its high of $27.22 to near $2 by February. The plunge was largely due to the company’s 47.2% drop in revenue YOY. While Redbox had been able to achieve $858 million in net revenue in 2019, this had declined to $288 million in 2021. At the same time, the company’s net loss had ballooned from only $7.5 million in 2019 to $140 million in 2021.

This caused analysts to cut their revenue forecasts for 2022 from $828 million to only $639 million which would be a 115% increase from the year before. While this downgrade does not bode well for the stock, it does point to analyst’s prediction that RDBX’s revenues will grow faster than the wider industry.

But the nail in the coffin was an 8-k filed at the end of January which caused the stock to fall 61% after the company explained that it had “borrowed the remaining availability under its revolving credit facility”. Redbox blamed the pandemic which pushed back many theatrical releases and sent movies straight to streaming services – disrupting the company’s typical seasonal patterns. In truth, the pandemic did have a very real impact on the physical theatrical titles released on Redbox’s network causing the number of films to drop from 140 in 2019 to 57 in 2021.

Although RDBX stressed that its management was actively taking steps to decrease monthly costs, shareholder confidence was shaken. The stock stayed relatively dormant until the end of March when it saw a 69% increase but quickly began downtrending again until a sudden spike on April 20th.

This uptick has been largely fueled by RDBX’s potential to become a meme stock thanks to its nostalgic brand image and high short interest. Seemingly undeterred by the company’s illiquidity, investors have compared RDBX to Gamestop in hopes that its epic short squeeze can be recreated. But some bullish investors have also pointed to Redbox’s potential to weather the storm and come out the other side as a digital streaming brand.

RDBX Financials
As previously mentioned, Redbox’s financial state is one of the main reasons for its increasing short interest. In its annual report, Redbox itself has noted that “the Company’s recurring operating losses, accumulated deficit and negative working capital, raise substantial doubt about our ability to continue as a going concern”.

In terms of revenues, RDBX reported $288.5 million – a 47.2% decline from 2020. While RDBX reduced its operating costs from $608.3 million to $431.8 million, this decrease was not enough to limit the impact of its declining revenues. As a result, RDBX reported a net loss of $143.2 million compared to the $62.1 million net loss reported the previous year.

Operating cash flow also declined from a positive $102.8 million in 2019 to a negative $29.2 million in 2021. With $321.57 million in debt and only $18.4 million cash on hand, RDBX is in a poor position to pursue its its digital transformation.

However, without further investments in its digital business the company will likely remain stagnant. Overall, its digital business contributed only 12.2% to the company’s overall revenue. Although, it did generate a profit whereas its legacy business contributed to 87.8% of RDBX’s revenue but was unprofitable.

Short Squeeze
Around April 28th, Redbox stock began attracting investors attention on Reddit and FinTwit due to its short squeeze potential. As a penny stock trading around $3, it was a better candidate than other stocks since it would not be influenced by options trading. RDBX stock is also an excellent short squeeze candidate thanks to its low float of only 2.7 million.

Given the high short interest of 52% at the time and 100% utilization, RDBX stock quickly took hold as a short squeeze stock. This combined with its similarity to GameStop and AMC in terms of nostalgic brand image, made RDBX stock the perfect storm for retail investors.

After a bumpy ride, the short squeeze effort is still strong and could be reinvigorated by the updated numbers from Ortex. According to the platform’s estimates, short interest has reached 77% of the free float and RDBX stock has made its way to the #1 spot on Fintel’s Short Squeeze Leaderboard. With no shares left to borrow, a borrow fee of 597%, and .02 days to cover, RDBX stock could be in an excellent position for a short squeeze.

So far volume has reached 12 million – 3 million higher than average. But Redbox stock is at risk of losing its momentum if retail investors become distracted with other trending stocks like Vinco Ventures Inc. (NASDAQ: BBIG) or Aterian Inc. (NASDAQ: ATER) which have been gaining momentum lately.

Technical Analysis
Currently trading at $6.14, RDBX is starting to curl up and could continue to rebound off of its support at 6.05. It shows a weak resistance at 6.52 which it has been retesting as well as resistance at 7.45. After these weak resistances it shows strong resistance points at 8.34 and its high near 11.00. Meanwhile, RDBX has a second support at 5.31. After spiking a few times, accumulation remains fairly steady while the RSI shows an uptick at 44 after rebounding from overselling. The MACD is bullish.

With new short interest numbers released over the weekend, Redbox stock could start the week off strong. Considering its high short interest, low float, and 100% utilization, more momentum might flow into RDBX stock which has been gaining popularity among investors. With the stock starting to curl up and more money flowing into small caps, Redbox could have a second run. Especially now that its RSI and MACD have reset, giving it more room to run.

RDBX Stock Forecast 2022
Despite its short squeeze potential, Redbox does face significant challenges in pursuing its digital transformation. With low liquidity and high debt, the company appears poised for additional problems. Its CFO Kavita Suthar who oversaw the company’s SPAC merger and public listing has also decided to step down – a bearish sign for some investors.

But on the other hand, these risks and challenges are an unavoidable side effect of Redbox’s undertaking. While analysts cut their revenue predictions for the year, they did predict that RDBX’s revenues will grow faster than the wider industry. The fact that Redbox is pursuing a more profitable business direction – albeit difficult one given the crowded sphere of streaming services – could be a sign of better things to come for the company.

This digital transformation has been years in the making and Redbox has perfected its marketing strategy, tiered rewards system, and communication with its loyal customer base to facilitate the final leap to subscription based services. Redbox has diversified its range of entertainment windows to capture multiple revenue streams while appealing to different audiences. From ad support TV channels, to on demand digital rentals, and convenient DVD rentals – there is something for everyone with Redbox.

Recovering from the impacts of the pandemic, Redbox could present better results in its next annual report. In the long-run, if Redbox is able to capitalize on its business model and strong customer base it could emerge as one of the notable digital entertainment providers.

While Redbox still projects that the bulk of its revenue will come from its legacy business for the next few years, it expects incredible growth in its digital business. Aiming for $193 million in revenue this year from its digital business, RDBX anticipates that this will almost double by 2023 for a total of $384 million. If it achieves its projections of $906 million in total revenue for 2022 this would yield a gross profit of $506 million and provide $173 million free cash flow.

These bullish projections are a sign of how seriously the company’s management takes its new venture. Whether this pans out as well as hoped remains to be seen, but considering the incredible turnaround AMC achieved thanks to retail investors – Redbox could be one to watch.